AWOCATURA GENERALE DELLO STATO
ATTI DEL GIUDIZIO STA TI UNITI D'AMERICA
CONTRO REPUBBLICA ITALIANA
dinanzi alla Corte internazionale di giustizia dell'Aja
Sentenza 20 luglio 1989
RASSEGNA DELL'AVVOCATURA DELLO STATO
Supplemento al n. 6-1989
ISTITUTO POLI GRAFICO E ZECCA DELLO STATO
ROMA 1992
(2219123) Roma, 1992 - Istituto_ Poligrafico e Zecca dello Stato P. V.
SOMMARIO
Memoria del Governo U.S.A ............................................... pag. I
Contromemoria del Governo italiano . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . » 73
Replica del Governo U.S.A ........................................... : .... . 121
Controreplica del Governo italiano ........................... , ............. ~· )) x8x
Verbali del dibattimento: ...................................... ,·, ... , ..... ,. ))· 243
Arringa Sofaer . . . . . . . . .............................................. . 246
Arringa Matheson ................................................... . » 250
Interrogatorio Adams ................................................. . )) 257
Arringa lVlatheson . . . . . . . . . . . . . . . . . .................................. . 261
Controinterrogatorio Adams ........................................... . )) 267
Interrogatorio Clare ........................... , ...................... . 276
Controinterrogatorio Clare ............................................ . 284
Consulenza Bonelli .................................................. . 289
Consulenza Fazzalari ................................................. . )) 294
Arringa Murphy )) 302
Arringa Gardner » 310
Arringa Ramish ..................................................... . )) 329
Consulenza Lawrence ................................................. . 335
Arringa Ramish ..................................................... . 343
Arringa Matheson ................................................... . 349
Arringa Ferrari Bravo , ............................................... . » 356
Arringa Gaja . . . . . . . . . . . . . . . . . . . . . .................................. . » 363
Arringa Libonati . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ . 372
Arringa Caramazza .................................................. . )) 382
Arringa Bonelli ..................................................... . )) 397
Arringa Capotorti . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............ . » 410
Arringa Monaco ..................................................... . 425
Consulenza Hayward .............. · · ................................. . » 431
Replica Highet . . . . . . . . . . . . . . ........................................ . » 436
IV SOMMARIO
Replica Ferrari Bravo ................................................ .
Replica Matheson ................................................... .
Replica Chandler . . . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . . ..........•....
Consulenza Bisconti ........•.........................................
Replica Chandler .................................................... .
Controinterrogatorio Bisconti
Consulenza Lawrence ................................................. .
Replica Matheson ................................................... .
Replica Highet .............................................•........
Replica Libonati .................................................... .
Replica Caratnazza . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Replica Capotarti ................................................... .
Replica Gaja ....................................................... .
Replica Ferrari Bravo ..........................•......................
» 461
465
474
480
» 484
491
)) 496
» soo
» 510
» 519
)) 527
» 532
538
543
MEMORIAL
SUBMITTED BY THE
UNITED STATES OF AMERICA
(CASE CONCERNING ELETTRONICA SICULA S.P.A. - ELSI)

PART I
INTRODUCTION
This case concerns the failure of the Government of Italy to afford to United States investors
in Italy the protections and guarantees established by the 1948 Treaty of Friendship, Commerce
and Navigation between the United States of America and the Italian Republic (the "Treaty »)
and its I95I Supplement.
Beginning in 1956, Raytheon Company and, subsequently, Machlett Laboratories, lnc.,
two United States corporations, invested in and gradualiy acquired complete ownership of
an Italian electronics company, Elettronica-Sicula, S.p.A. (« ELSI »). By 1967, ELSI had
become an established and reputable producer of highly sophisticated electronics components.
However, despite large investments of capitai and other assistance from its United States owners,
ELSI never became financialiy self-sufficient. In March 1968, therefore, Raytheon and Machlett
reluctantly decided to dose and liquidate ELSI and to settle ali outstanding debts from the
proceeds of the sale of its assets.
On I Aprii 1968, however, the Government of Italy requisitioned ELSI's plant and related
assets, in order to prevent the liquidation and to facilitate the acquisition of ELSI's assets by
Italy's commerciai conglomerate Istituto per la Ricostruzione Industriale (« IRI »). As a result,
Raytheon and Machlett were unable to seli the plant and other assets and were forced to put
ELSI into bankruptcy. Italian officials then publidy announced that ELSI would be taken
over by IRI. lnstead of buying ELSI's assets at the scheduled bankruptcy auctions, however,
IRI negotiated a piecemeal take-over with bankruptcy authorities, selectively acquiring the
assets it wanted at a price substantialiy below fair market value. The bankruptcy authorities
similarly failed to recover the fair market value of ELSI's other assets. Bankruptcy proceeds
accordingly were not sufficient to pay ELSI's debts. While ELSI had immediately appealed
the requisition order to the appropriate Italian authority, who found it unlawful, this decision
was not rendered until after Italy had purchased ELSI's plant and other assets.
As a result, Raytheon and Machlett suffered financial losses which they would not have
suffered, had they been aliowed to proceed with the planned liquidation of ELSI, or even had
Italy formaliy expropriated ELSI and paid just compensation. Most significantly, Raytheon
did not recover any of the amounts it was owed by ELSI, and was required in addition to satisfy
Italian bank loans to ELSI which it had guaranteed. Five banks which were owned and controlied
by the Government of Italy also brought suit against Raytheon in Italian courts for payment
of loans to ELSI which Raytheon had not guaranteed. This litigation, which continued for
r6 years at great expense to Raytheon, ended with the dismissal of ali suits as unfounded.
The United States contends that these actions constitute a violation of the Treaty and
Supplement. As explained below, the requisition and subsequent conduct were both arbitrary
and discriminatory, prevented Raytheon and Machlett from managing and controliing an
Italian corporation whose shares they had lawfuliy acquired, and resulted in the impairment
of their legally acquired rights and interests- in violation of Artides III and VII of the Treaty
and Artide I of the Supplement. In addition, the requisition constituted a taking of Raytheon's
ànd Machlett's interests in property without due process and without adequate compensation,
4 INTRODUZIONE
in violation of Artide V of the Treaty. Italian authorities also failed to comply with the obligation
under Artide V to afford the protection and security, by the unwarranted delay in ruling on
the challenge to the requisition order and by failing to afford protection to ELSI's plant and
premises.
After x8 years of unsuccessful attempts to resolve this matter through diplomatic channels,
the United States appeals to the Court to fì.nd that the requisition and other actions and
omissions of Italy constituted violations of the Treaty and Supplement and to order that full
compensation be made to the United States for the damages suffered by Raytheon and
Machlett as a result of Italy's failure to accord them the protections guaranteed by the Treaty
and Supplement.
PART II
STATEMENT OF FACTS
CHAPTER I
BACKGROUND
From I955 through I967, Raytheon Company and Machlett Laboratories, Inc., two
United States corporations, acquired Ioo% of the shares of Elettronica Sicula S.p.A.
(« ELSI ))), an Italian electronics company operating in Palermo, Sicily. Although they
developed ELSI into a manufacturer of sophisticated electronics equipment and a major
employer in the Sicilian Region, ELSI never became a profitable enterprise. In I967-
Ig68, Raytheon and Machlett made a last major effort to make ELSI profitable.
SECTION 1. - The Treaty of Friendship, Commerce and Navigation.
On 2 February 1948, the United States and Italy signed a Treaty of Friendship, Commerce
and Navigation (the « Treaty ))), The Treaty entered into force on 26 July 1949 (1). The Treaty
was subsequently strengthened by an Agreement of 26 September 1951 (the « Supplement ))),
which entered into force on 2 March 1961 (2). One of the major purposes of these agreements
was to encourage American investment in the I talian postwar economy by establishing a mutually
agreed framework of legai protection for commerciai activities and investments of United States
nationals in Italy (3).
As reflected in Artide V of the Supplement, the Government of Italy was particularly
interested in promoting new investment in its Southern Region, the Mezzogiorno,, an historically
underdeveloped area which includes the island of Sicily (4). Toward that end, the Government
of Italy enacted incentives to encourage foreign investment in that Region and created a specific
ministry within the national government to administer these programs and otherwise to encourage
development in the Mezzogiorno (5).
(l) Treaty of Friendship, Commerce and Navigation between the United States of America and the Italian
Republic, signed at Rome, 2 Feb. 1948, entered into force, 26 July 1949. T.I.A.S. 1965; 79 UNTS 171 (Annex 1).
(2) Agreement Supplementing the Treaty of Friendship, Commerce and Navigation of 2 Feb. 1948, signed
at Washington, 26 Sep. 1951, entered into force, 2 Mar. 1961. T.I.A.S. 4685; 404 UNTS 326 (Annex 2).
(3) The importance of the Treaty to the Government of Italy as one means of encouraging United States
investment in Italy is highlighted in the attached Reports from the Italian Parliament. Chamber of Deputies,
Parliamentary Proceedings, Documents- Bills and Reports, N. 246-A, p. 4, presented to the Office of the President
on 2 Mar. 1949 (Annex 3); Senate of the Republic, Legislature III, 291st Session, Assembly, p. 13758,
19 July 1960 (Annex 4). See also, discussion, infra, pp. 27-28 on Italian parliamentary consideration.
(4) Map of Italy, highlighting the Mezzogiorno Region (Annex 5).
(5) The Foreign Investor's Digest of Italian Corporate Law, pp. 245-254 (1963) (Annex 6).
6 RASSEGNA DELL'AVVOCATURA DELLO STATO
SECTION 2. - Raytheon's and Machlett's Investment in ELSI.
Raytheon Company (« Raytheon »), a United States electronics manufacturer incorporated
in Delaware (6), was a participant in this postwar investment activity (1). In 1952, Raytheon
entered into a licensing and technical assistance agreement with an Italian company based in
Genoa, Fabbrica Italiana Raddrizzatori Apparecchi Radiologici (FIRAR) (8). Subsequently,
the owners of FIRAR decided to transfer its business to a relatively new company located in
Palermo, Sicily- Elettronica Sicula, S.p.A. (« ELSI »)- and proposed that Raytheon become
a shareholder in ELSI. In Raytheon's view, .ELSI had very good prospects of success, notwithstanding
its location in a remote and underdeveloped area. ELSI was supported by an experienced
and successful Italian partner, the Moro Group, as well as by the strong government policy
of support for business development in the Mezzogiorno (9). Moreover, the Italian Government
offered and publicized investment incentives to companies investing in the Mezzogiorno (1°).
Raytheon acquired a 14 % shareholder interest in ELSI in 1956 (11).
From 1956 through 1967, Raytheon invested some 7.421 billion (12) lire (US$u,899,300) (18)
in ELSI, ultimately acquiring 99.16 % of its shares (14). Raytheon also guaranteed over 5 billion
lire (US$8,ooo,ooo) of loans to ELSI by various Italian banks (15). Machlett Laboratories, lnc.,
a United States corporation incorporated in Connecticut specializing in the manufacture of
X-Ray tubes (16), acquired the remainder of ELSI's shares in Aprii 1967, investing 34 million
lire (US$54,1oo) in ELSI (17).
In addition to their direct investment, Raytheon and Machlett supported ELSI by providing
patents, licenses and other technical assistance, providing management, marketing, and other
expertise, and developing profitable business opportunities for ELSI, including a lucrative
contract to produce electronic tubes for the North Atlantic Treaty Organization (NATO)
HA WK missile system (18).
SECTION 3· - The Development of ELSI to I967.
By 1967, ELSI had become a significant manufacturer of sophisticated electronic components
and equipment and a major employer in Sicily, with a skilled work force of slightly under 900
(6) Raytheon Company Certificate of Good Standing, State of Delaware, 22 Dee. 1986 (Annex .7); Introductory
Pages from 1985 Raytheon Company Annua! Report (Annex 8); Affidavit of Charles F. Adams, Finance
Committee Chairman and Director, Raytheon Company, para. 9, 17 Apr. I987 (Annex 9).
(7) -Annex 9, paras. I o-u.
(B) Manufacturing and Sales Agreement between Raytheon Manufacturing Company and Fabbrica Italiana
Raddrizzatori Apparecchi Radiologici, I8 July I952 (Annex Io).
(9) Annex 9, paras. IO and I5.
(10) Annex 6; see also, Annex 9, paras. I5-I6.
(11) Letter of Participation from Raytheon Manufacturing Company to Elettronica Sicula, S.p.A., dated
21 Oct. I955, revised I5 Mar. 1956 (Annex II).
(12) Throughout this document, the term << billion » refers to I,ooo million.
(13) These are the actual United States dollar and Italian lire amounts of this investment. In the following
discussion, where it has been necessary to determi:ò.e a dollar amount based on an actual lire figure, or vice versa,
this Memoria! uses an exchange rate of United States $t.oo to ltalian L. 625, the generally prevailing exchange
rate from 1967 through 1971. Selected United States Dollar-Italian Lire Conversion Rates from The Wall Street
]ournal (for dates 29 March I968, 19 Aprii I968, 29 Aprii I968, 30 June I97I) and The Washington Post (for dates
I Apri! I968, II July I969, 24 January I974) (Annex 12). The Affidavit of Arthur Schene, former Raytheon Vice
President-Controller (Annex 13) provides complete details of relevant investment and statistica! information about
ELSI's financial history and other matters relevimt" to the claims of the United States.
(14) Annex 9, paras. I2-I3; Annex I3, para. 7 and Schedule A; Affidavit of Herbert Deitcher, Vice President
and Treasurer, Raytheon Company, para. 2 and Exhibit A, 6 Jan. 1987 (Annex I4); see also, Affidavit of John
D. Clare, former Chairman, Raytheon Europe International Company, para. 9 and Exhibit A, Io Jan. 1987
(Annex 15). ELSI was renamed << Raytheon-ELSI » in I963 to reflect Raytheon's ownership of a majority of
ELSI's shares. This Memoria! will refer to the corporation as << ELSI » throughout.
(15) Annex I3, Schedule 12.
(16) The Machlett Laboratories, Inc., Certificate of Good Standing, State of Connecticut, 26 Dee. I986
(Annex I6).
(17) Annex 9, para. 14; Annex I3, paras. 7 and 21 and Schedule A; Annex I4, para. 2 and Exhibit A.
(18) Annex 9, para. 17.
MEMORIA DEL GOVERNO U.S.A. 7
employees, a large, modern, fully-equipped plant in Palermo, a reputation for quality products,
and a significant volume of sales and export earnings (19).
ELSI had five major product lines: microwave tubes, cathode-ray tubes, semiconductor
rectifiers, X-ray tubes, and surge arresters (20). Using Raytheon technology, ELSI produced
microwave tubes, which generate high-frequency electromagnetic waves, for NATO Hawk
Missile system and other uses, including telecommunications, radar, and industriai heating.
ELSI's cathode-ray tubes were TV picture tubes, the most complex component in televisions.
I ts semiconductor rectifiers, which convert alternating current to direct current, were used in
X-ray equipment, radio and television stations, electrostatic filters, and domestic appliances.
Using Machlett technology, ELSI produced X-ray tubes, primarily for medicai use, and surge
arresters, which protect against overvoltage surges in telephone lines, cables and terminallines (21).
ELSI sold these products throughout Europe, the United States, Japan, and other international
markets. For each of the fiscal years ending 30 September 1965 and 30 September
1966, ELSI's sales totalled over 8 billion lire (US$12,8oo,ooo) (22). In addition to goods sold
to NATO, just under 30 % of the sales during this two-year period represented exports from
Italy (28).
ELSI thus became an established business. It did not, however, become self-sufficient.
During fiscal years 1964 through 1966, ELSI made an operating profit, but this profit was
insufficient to offset its debt expense or accumulated losses, and no dividends were ever paid
to its shareholders (24). As of 30 September 1966, the accumulated accounting losses, as shown
on the balance sheet, were some 2 billion lire (US$3,200,ooo) (25).
SECTION 4· - Final Efforts at Self-Sufficiency.
In February 1967, Raytheon embarked upon a major effort to make ELSI self-sufficient.
It designated Mr. John D. Clare, Raytheon Vice President and Generai Manager of its European
management subsidiary Raytheon Europe International Company, to be ELSI's Chairman and
directed him to determine and implement appropriate steps to improve ELSI's financial performance
(26
). Raytheon and Machlett also designated other highly qualified individuals to
assist ELSI (27). Some of these individuals worked full-time and others on a consultant basis
to provide ELSI their specializ;ed financial, managerial, and technical expertise. Raytheon
also provided over 4,ooo million lire (US$6,4oo,ooo) to ELSI in recapitalization and guaranteed
credi t (28).
This 1967 effort focused in part on improving the efficiency of administratfon and operations
at the ELSI plant in Palermo. By December 1967, major steps had successfully been taken
to upgrade plant facilities and operati.ons, including a comprehensive inventory, implementation
(19) Annex 13, paras. 8, 9 and 12; <<A New lndustry in an Ancient Land •>, Raytheon-ELSI, S.p.A., Brochure
Oct. 1963 (Annex 18); Sales brochure, Raytheon-ELSI, S.p.A. (Annex 19); Aerial photograph of Elettronica Sicula,
S.p.A. plant in Palermo, Sicily, 1962 (Annex 20). Affidavit of Rico A. Merluzzo, former Director of Planning
Raytheon-ELSI, S.p.A., para. 8, 17 Apr. 1987 (Annex 21). « Project for the Financing and Reorganisation [sic]
of the Company », 1967 Report prepared by Raytheon--ELSI, S.p.A., pp. 20-21 (Annex 22); Affidavit of Dominic
A. Nett, former Controller, Raytheon-ELSI, S.p.A., 17 Aprii 1987 (Annex 30).
('O) Annex 21, para. 8. These product lines are pictured and described in Annexes x8 and 19.
(21) Annex 15, para. II; Annex 21, para. 8.
(22) Annex 13, Schedule B3; Annex 22, pp. Iù-21. ELSI's fiscal year was I October- 30 September. Unless
otherwise noted, fiscal year data will· be given based on the accounting methods used in preparing ELSI's
accounting records.
(23) Annex 22, pages 20-21.
(24) Annex 13, Schedule B3; Annex 15, para. 12.
(26) Annex 13, Schedule Bx.
(26) Annex 9, paras. 20-22; Annex 15, paras. 14-15; Affidavit of Joseph A. Scopelliti, former Chief Financial
Officer and Controller, Raytheon Company, para. 2, I Apr. 1987 (Annex 17).
(27) Annex 9. para. 21; Annex IS, paras. 33-3s; Annex 17, para. 2; Annex 21, paras. s-8.
(28) Annex 9; para. 28; Annex 14, para. 2 and Exhibit A; Annex 15, para. 21.
8 RASSEGNA DELL'AVVOCATURA DELLO STATO
of improved quality production, and scrap contro! systems, establishment of a major worker
training program, and the restructuring of production facilities (29).
In Raytheon's view, however, it was most criticai to ELSI's self-sufficiency and hence
survival to develop further its product base, personnel, and piace in the Italian economy.
Raytheon management had concluded that, as an American-owned fìrm, ELSI was at a competitive
disadvantage in seeking to develop Italian markets (30). This goal therefore entailed severa!
interrelated objectives: to develop new products an d markets in order to expand an d diversify
its business and make full use of its operating capacity; to secure an Italian partner with economie
power and influence; and to be assured of the criticai interest and support of the national and
regional governments (81). The latter was particularly important because of the Italian Government's
dominant role as a customer and supplier in numerous markets crucial to ELSI's operations
and success, including the electronics, telecommunications, health care, military supplies,
information and transportation systems, and the Italian banking system (3 2).
ELSI sought to benefìt from Italy's Mezzogiorno incentive laws, especially (1) the socalled
« 30 % law " which required 30 % of government agency supply and job contracts to be
made from companies located in the Mezzogiorno; and (2) from transportation subsidies for
businesses in the Mezzogiorno (33). The 30% law was especially important to ELSI's X-ray
tube business, since government-controlled hospitals were purchasing X-ray tubes from outside
Italy which could have been purchased within Italy from ELSI in the Mezzogiorno (34). The
transportation subsidies were especially important to the cathode-ray tube business, because
the large size and weight of ELSI's products made transportation costs particularly expensive (35).
Many important potential new markets for ELSI products and many of ELSI's suppliers
were government-controlled, primarily by the Istituto per la Ricostruzione Industriale
(« IRI ") (36
). IRI, which had been created in 1933 to take emergency contro! of banks during
Italy's banking crisis, had developed into a permanent holding company with extensive and
wide-ranging commerciai interests, dominating, among other things, the telecommunications,
electronics and engineering markets (37). IRI has been described as:
« Europe's largest market-disciplined public enterprise group. ... It owns three of the
largest national banks, and accounted for one fìfth of the total of Italian bank deposits.
In servi ce companies it owns Alitalia, the main shipping companies, runs I talian radio
and television (RAI), the larger part of the Italian telephone system, and has built over
half the renowned national motorway network. In manufacturing it produces some
three-fìfths of Italian steel, over three quarters of ships built, owns the Alfa-Romeo motor
car company, and has an important stake in other national engineering sectors (38) "·
By the end of 1967, IRI had a majority shareholder interest valued at over 1,206 billion
lire (US$1,929,6oo,ooo) in some 139 companies, which employed some 290,000 persons and
had combined sales of 2,230 billion lire (US$3,s68,ooo,ooo) (39).
( 29) Annex 15, para. 36; Annex 21, paras. 9-15.
(30) Annex 17, paras. 3-4.
(31) Annex 9, paras. 24-25; Annex 15, para. 18; Annex 17, paras 4-5.
(32) Annex 9, paras. 24-25; Annex 17, para. 3· Moreover, the policies set by the Government of Italy in any
ofthese areas directly affected ELSI's operations. For example, in March 1967, the Chamber of Deputies approved
the first five-year pian for the Italian economy, which included detailed plans for the development of ltalian industry.
Quarterly Economie Review Annual Supplement, The Economist Intelligence Unit (1967) (Annex 23).
( 33) Annex 6; Annex 15, paras. 28-31; Annex 17, para. 4·
(34) Annex 15, paras. 28-31.
(35) Annex 15, para. 19.
( 36) Annex 17, paras. 3-4.
( 37) Annex 17, para. 3· Raytheon had previously established a successful partnership with IRI and the private
firm ~IAT through their joint ownership of Selenia, an electronics company on the Italian mainland. Raytheon
supphed Selenia managerial and technical expertise; IRI furnished Selenia access to markets controlled by IRIaffiliated
companies and the Italian Government. Annex 9, para. 25. Raytheon therefore had reason to believe
that a similar cooperative relationship could be established with the Italian industriai community, and with IRI
in particular. lbid., paras. 24-25.
(38) Annex 25, p. 47·
(39) Annex 23; IRI, Istituto per la Ricostruzione Industriale, 1967 Annual Report, (pp. 38-39, 65 (Annex
24); The State As Entrepreneur, pp. 45-49, 56-6o (S. Holland ed. 1972) (Annex 25).
MEMORIA DEL GOVERNO U.S.A. 9
Because of IRI's importance and the importance of a strong commerciai reiationship with
the government, Mr. Ciare and other senior Raytheon officiais heid some 70 meetings with
Italian ieaders between February 1967 and March 1968 (40
). In these meetings- with cabinetievei
officiais of the nationai government and the Siciiian Region, as well as representatives of
IRI, the Ente Siciliano per la Produzione Industriale "ESPI'' (the Siciiian Government
industriai organization responsibie for the promotion of iocal deveiopment), and the private
sector - ELSI's management and sharehoiders attempted to find ELSI a strategie Italian
partner and expiore the possibiiities of other governmentai support (41). In particuiar, Raytheon
and ELSI deveioped and presented to Itaiian and Siciiian officiais numerous specific proposais
of ways for the Italian Government to meet its goais of industriai deveiopment in the Mezzogiorno
through a partnership with ELSI and support for ELSI's deveiopment of new products
and markets (42).
At first, Itaiy's response was encouraging. ESPI's President and the President of the
Sicilian Region were enthusiastic about a partnership with ELSI (43). Simiiarly, other Itaiian
officials, including senior officiais at the Ministries of the Treasury and of Industry, Commerce,
and Crafts, expressed their continuing support for the officiai poiicy of Mezzogiorno deveiopment
and their specific interest in heiping ELSI (44).
Notwithstanding this support for ELSI from representatives of the regionai and nationai
governments, IRI was not prepared to invest in or consider other commerciai reiationships
with ELSI (46). On 4 January 1968, a senior IRI officiai confirmed that IRI was interested in
furthering its own activities in the electronics field (46). IRI's specific pians at that time were
apparently stili being deveioped; the official said that IRI would not enter into a relationship
with ELSI at that time, but might be willing to reconsider the decision later, perhaps in a
year (47). ELSI would require additionai capitai contributions from its shareholders, a commitment
they couid not make unless there were good prospects that ELSI wouid become financially
seif-sufficient (48).
( 40) Annex 9, paras. 29-31; Annex 15, paras. 22-46; Annex 17, para. 5·
(41) Annex 9, paras. 29-30; Annex 15, paras. 23-32 and 37-44; Annex 17, paras. 3-5.
(42) Annex 9, paras. 22-23; Annex 13, para. 13; Annex 15, para. 20. ELSI's detailed proposals for its future
development are contained in Annex 22. As explained by Charles F. Adams:
« If ELSI was going to be successful, it had no choice but to obtain a major Italian partner. Mter La
Centrale decreased its ownership of ELSI in the early 196o's, ELSI was viewed as an' American' Company.
W e had learned by 1967 that, in order for a company to be successful in Italy, it had to be viewed as
' Italian ' and have an ' Italian link ' or ' contact ', which would provide access to important Italian markets
and the contacts necessary to obtain vita! support from the Italian government. The only way for ELSI
to be viewed as an Italian company and have that necessary link was to acquire a major Italian partner, such
as IRI and Ente Siciliano per la Produzione Industriale (' ESPI '), the Sicilian governmental entity responsible
for funding and promoting local development ».
Annex 9, para. 24.
(43) Annex 15, paras. 24, 26 and 44, and Exhibits A and B. Because ELSI was a large employer, and because
Sicily hoped to develop its electronics industry, the Sicilian Region had a strong interest in keeping ELS I operating.
Annex 15, paras. 24, 26 and 27.
(44) Annex 15, paras. 25-30.
(46) Annex 9, para. 30; Annex 15, paras. 31-38.
(46) Annex 9, para. 30; Annex 15, paras. 38-40 and Exhibit C.
(47) Ibid. Sicilian officials were not prepared to enter a financial relationship with ELSI without IRI's support.
Annex 9, para. 31; Annex 15, paras. 37-38.
( 48) Annex 15, para. 21. They made this business judgment well known to the Government of Italy. Annex
9, para. 28; Annex 15, para. 21.
CHAPTER II
INTERVENTION BY THE GOVERNMENT OF ITALY TO PREVENT THE ORDERLY
LIQUIDATION OF ELSI
Raytheon and Machlett decided in March I968 to close ELSI and take it through an orderly
liquidation. However, the Mayor of Palermo, acting as an official of the Italian government,
requisitioned ELSI' s assets to prevent the liquidation. The President oj Sicily threatened that
the requisition would be maintained indefinitely unless Raytheon contributed additional capitai,
kept the plant open and unilaterally absorbed ELSI's losses. With its assets being held by
the Italian Government, and debts coming due, ELSI had no choice but to declare bankruptcy.
SECTION I. - The Decision to Liquidate ELSI.
Because their discussions with leaders of the Italian Government and others in Italy did
not appear to be leading to a successful conclusion, ELSI's shareholders began seriously to
plan to dose and liquidate ELSI to minimize their losses (1). They had made a business judgment
not to infuse additional capitai into ELSI if ELSI could not be made self-sufficient, since it
appeared that further investments, like earlier investments, would be lost (2). Without an
additional capitai contribution, the shareholders would eventualiy have no alternative under
Italian law but to liquidate (3).
Raytheon's management and shareholders continued to meet with Italian officials through
the first quarter of 1968, stressing that ELSI's shareholders were considering closing the
plant (4
). Despite periodic mention of possible cooperation at some future time (5
), Italian
agencies were unwilling to finalize any plan to keep ELSI in business (6).
To prepare for ELSI's liquidation, therefore, Raytheon sent its Vice President, Joseph
Oppenheim, to Palermo to be ELSI's Chairman. Mr. Oppenheim had the strong financial
and market expertise needed to conduct the liquidation, and was assisted by similarly experienced
senior management officials (?).
Under a comprehensive liquidation pian prepared by Raytheon Europe's Controlier Joseph
Scopelliti along with Mr. Oppenheim and others, ELSI would maintain a limited operation
to complete work-in-progress and fili existing purchase orders, thereby preserving it as a going
concern and making it more attractive to potential purchasers. Ali possible steps were to be
taken to maintain good relationships with ELSI's customers and suppliers so that potential
purchasers could be offered ELSI's businesses as a going concern, including its established
name and reputation, customer and supplier relationships, and the necessary patent and trademark
licenses and technical assistance from Raytheon and Machlett, in addition to the equipment
( 1) Annex 9, paras. 32-35; Annex 13, para. 13; Annex 14, para. 3; Annex 17, paras. 5-14.
( 2) Annex 9, para. 20; Annex 15, para. 21; Annex 26, para. 4·
(8) Annex 15, para. 42-43; Affidavit of Avv. Giuseppe Bisconti, Studio Legale Bisconti, Rome, para. 4, II
Dee. 1986 (Annex 26).
(4) Annex 13, para. 13; Annex 15, para. 43·
(5) E.g., Annex 15, para. 44 and Exhibit B.
(6) Annex 9, para. 30; Annex 15, para. 42.
(7) Annex 9, paras. 32-35; Annex 15, paras. 49-53; Annex 26, para. 5·
MEMORIA DEL GOVERNO U.S.A, 11
and other tangible assets (8). ELSI's business would be offered for sale both as a total package
and as individuai product lines to maximize the price realized under the liquidation (9),
As of 31 March 1968, the book value of ELSI's assets was 17.05 billion lire (US$
27,2oo,ooo) (1°). ELSI's fìnancial condition would, of course, bave been stronger had it received
the benefìts of the widely-publicized Mezzogiorno incentive laws and had it been able to expand
its position in the Italian market (11). Tbis book value represented a fair measure of the value
of ELSI's assets on a going concern basis (12). On tbe otber band, for internai planning purposes,
Raytbeon estimateci tbat a guaranteed minimum of 10.84 billion lire (US$17,28o,ooo) could
be realized on a « quick sale " basis (13).
ELSI's liabilities, on tbe otber band, totalled some 16.66 billion lire (US$26,6s6,ooo) (14
).
Tbus, from tbe sale of ELSI's assets on a going concern basis, enougb money would bave been
realized to pay off ELSI's liabilities in full, including tbe amounts owed by ELSI to Raytbeon,
with a 391 million lire (US$62s,6oo) surplus to Raytbeon and Machlett as a small return on
their investment (lD).
At worst, if only 10.84 billion lire were realized, Raytbeon intended to use tbe proceeds
from tbe sale of ELSI's assets to pay in full ELSI's preferred and secured creditors andali of
ELSI's smaller unsecured creditors (16). Raytbeon reasonably anticipateci, bowever, tbat tbe
bank creditors witb large unsecured, unguaranteed loans would quickly settle their claims at
no more tban so % of tbis value as part of tbe orderly liquidation, as sucb a settlement would
guarantee prompt and substantial payment, as compared witb receiving little or nothing in
bankruptcy (17). In tbis event, tbe liquidation would cost Raytbeon some 3·79 billion lire
(USS6,o82,6oo), for partial recovery of amounts owed to it on open account and to pay off tbe
remainder of ELSI's guaranteed loans (18
).
Raytbeon's Italian counsel, Avv. Giuseppe Bisconti, advised ELSI and its sbarebolders
in Marcb 1968 that an orderly liquidation was botb legally possible and prudent in view of
(B) Annex 9; Annex xs, paras. 49-S3·
(9) Annex 15, para. SI; Annex 17, para. 12; Annex 26, para. s. ELSI's product lines are pictured and described
in Annex 18 and Annex 19. An extensive exposition of the liquidation plan is contained in Annex 17, paras.
6-14.
(1Q) Annex 13, Schedule B1.
(11) Annex 17, paras. 3-4.
(12) Ibid., para. 1s.
(13) Annex 17, para. 16 and Schedules Cx, C2, C3 and C4; Annex 17, paras. 7-10 and Exhibit A. This
conservative valuation, personally prepared by Raytheon Europe's Chief Financial Officer and Controller, deliberately
omitted the significant intangible value of ELSI's businesses, including: '
« [I]ts excellent reputation as a producer of reliable electronic products, and its experience and know-how
in the electronics industry, its supplier and customer lists and market reputation, patent licenses and other
rights to technology supplied by Raytheon and Machlett, and other contracts. Moreover, in ELSI's case, its
products were backed by the strong names, technology and reputations of Raytheon and Machlett Laboratories,
Inc., and it had established products with a reputation for quality. In our judgment, these items were
of significant value and interest to potential buyers >),
Annex 17, para. 8. The plan was conservative to reflect << the minimum prospects of recovery of values which
we could be sure of, in arder to ensure an orderly liquidation process >), Ibid.
(14) Annex 13, Schedule E (« Total Adjusted Claims •). This included some 5.71 billion lire (US$9,10o,ooo)
in principal and interest on loans guaranteed by Raytheon; some 1.14 billion lire (US$x,83o,ooo) in amounts owed
to Raytheon by ELSI; and some 9.81 billion lire (US$ xs,696,ooo) in other liabilities and expenses, including amounts
required for severance pay, taxes, and other expenses of the liquidation. Ibid.
( 15) Ibid., Schedule E; see also, Table at p. 6o, infra.
(16) Annex 13, Schedule F; Annex 17, para. 14.
(1"1) Annex 17. As described infra, at p. x6, these banks were willing to settle at so % or less as part of an
overall voluntary settlement. See Annex 26, para. x6; Affidavit of Joseph Oppenheim, former Chairman of the
Board, Raytheon-ELSI, S.p.A., 22 Sep. 1971 (Annex 27); Affidavit of Charles H. Resnick, General Counsel, Raytheon
Company, 8 Sep. 1971 (Annex 28); Affidavit of Avv. Giuseppe Biscanti, Studio Legale Biscanti, Rome,
20 Aug. 1971 (Annex 29). In fact, most unsecured creditors waited seventeen years until the bankruptcy closed
and then received less than I % of their claims because ELSI was forced to declare bankruptcy. See Annex 26,
Attachment. Raytheon and its subsidiaries with claims against ELSI were willing to accept settlements of so %
or less from ELSI as part of the orderly liquidation. Annex 13, Schedule D; Annex 17, para. 14.
(18) Annex 13, para. 16 and Schedule F, and detail at Schedules H4, 12 and J. As detailed ibid., Schedule J,
Raytheon and its wholly-owned subsidiary were owed 1.14 billion lire (US$x,83o,ooo) for goods and services rendered
on open account. Se.e also, Annex 14, para. 3; Table at p. 6o, infra. .
12 RASSEGNA DELL'AVVOCATURA DELLO STATO
ELSI's financial situation (19
). With preparations for liquidation completed, and no apparent
prospect of developing a cooperative business relationship with Italian authorities, ELSI's
Board of Directors voted on 16 March 1968 to cease full-scale production on 29 March 1968
and liquidate the company (20
). On 28 March 1968 ELSI's shareholders voted to affirm this
decision (21).
SECTION 2. - The Requisition of ELSI's Assets.
On 27 March 1968, the President of the Sicilian Region threatened four officers of Raytheon
Europe and ELSI that the Government of Italy would seize ELSI's plant and related assets
if its shareholders proceeded with their pian for an orderly liquidation (22). On 29 March 1968,
ELSI's management, acting pursuant to the decisions of ELSI's Board and shareholders, nonetheless
determined that it had no alternative but to proceed with the liquidation pian (23). That
night, the Generai Manager of the Ministry of lndustry Commerce and Crafts, speaking for
the Prime Minister of Italy, asked Mr. Clare to delay dosing ELSI, stating that Raytheon would
incur the Prime Minister's severe displeasure if the plant were dosed (24). Mter consulting
with Raytheon's President, Mr. Clare and his stati sent dismissal letters late the night of
29 March 1968 (26).
On 31 March 1968, at 6 :45 a.m., the President of the Sicilian Region met with ELSI's
Managing Director to inform him of the Italian Government's pian for ELSI. According to
the President, the Italian Prime Minister had said that the Government of Italy would requisition
ELSI's plant in order to prevent the liquidation (26). He stated that an ESPI-affiliated
company wouid be formed to run ELSI until IRI could acquire ELSI's assets (27). In addition
to their pian ultimately to acquire the assets, Italian officials did not want to allow ELSI to
dose on the schedule determined by ELSI's directors and shareholders. National eiections
were scheduied for May 1968, and government officials told Raytheon repeatedly that they
did not want the plant to dose, with resuiting large-scale unemployment shortly before an
election (28).
Accordingly, on 1 Aprii 1968 the Mayor of Palermo issued an order, effective immediateiy,
requisitioning ELSI's plant and related tangible assets for a period of six months (29). The
(19) Annex 26, para. 4· Avv. Bisconti explains:
«I advised Raytheon about the Italian lega! requirements for an orderly liquidation of an Italian company.
Under Italian law, in particular under Articles 2447 of the Italian Civil Code, when a company's capita! is
depleted below a statutory minimum amount (at the relevant time, the statutory minimum was x,ooo,ooo
Italian Lire), the directors are required to call a shareholders meeting in order that the shareholders bring the
capita! back at least up to the required statutory minimum. If the shareholders fai! to take the required action,
the company is dissolved as a matter of law under Artide 2448 of the Italian Civil Code. ELSI's capita!, after
taking into account losses to date at that time, was well in excess of the minimum statutory requirement.
I t was therefore possible under Italian law for ELSI's shareholders to pian an orderly liquidation of the company
~.
Ibid. ELSI would not at this point have been considered bankrupt under Italian law, as it was stili able to pay
its debts as they became due. Only later, when Italy had seized ELSI's assets to prevent the liquidation, were ELSI's
directors forced to file a petition in bankruptcy under Italian law. Annex 26, para. 12, and discussion infra,
pp. 14-IS.
(20) Minutes of Raytheon-ELSI, S.p.A., Board of Directors Meeting, x6 Mar. 1968 (Annex 31).
(21) Minutes of Raytheon-ELSI, S.p.A., Shareholders Meeting, 28 Mar. 1968 (Annex 32).
(22) On 27 Mar. 1968, he stated that « the plant would almost certainly be requisitioned t if ELSI sent out
letters of dismissal pursuant to the decisions of its Board of Directors. Annex 15, paras. 56-57 and Exhibit F.
(23) Annex xs, para. 58.
(24) Annex 15, paras. 58-59 and Exhibit G.
(26) Annex xs, para. 6o.
(26) Ibid., paras. 61-62 and Exhibit H.
(27) Ibid. According to the President, IRI preferred to acquire ELSI's assets for its own use rather than to
work with Raytheon to keep ELSI open because IRI did not want to enter a partnership with Raytheon.
(28) Annex 15, paras. 46 and 58; Annex 26, para. 6.
(29) Requisition Decree, Mayor of the Municipality of Palermo, I Apr. 1968 (Annex 33).
MEMORIA" DEL GOVERNO U.S.A. 13
order was based on a 1865 law·that bestowed extraordinary·power on Italian.administrative
authorities to « dispose of private property » for reasons of « grave public necessi:ty (30) ». Among
the stated reasons for the requisition were that « the local. press is taking a great interest in the
situation and ••. is being very criticai toward the authorities and is accusing them of indifference
to this serious civic prol:>l~rn » and that« t~ere is .a grave public necessity and urgency to protect
the gep~ral . e.co!lori:J,~c l'\ll)lic ipte.rest @rel{qy ~eriously compromised) f!Od public f)rder (81) ».
bri. Z Aprii x968, EtSI's mariagemenf relinquished coritrol of ELSI's . plàrit arid assets
to the Mayor on the adviée of local counsel (3'). As a :result of the requisitìt:m, ELSI's owners
àtid i:nariagement were•; as a matter· oflaw, deprived of control over and the tightto dispose of
ELSI's assets; and could not proeeed with the liquidation (33). ELSI's relationships with its
supplìers and customers were cut off abruptly, in'-process inventories could not be oonverted
to finished products, and neither ELSI's goods nor its other assets could be sold (34) •
• . ... ·• Although he had legru controlof the plant, the Mayor di d not attempt to ~:eopen and operate
it •• ·• Rather, Italian authorities allowed ELSI's former workers to. occupy. the plant (36). ELSI
representa:tives immediately sent cables asking the Mayor and other Italian authorities to revoke
the requisition, but received no response (36
). On. 9 Aprii ELSI formally Petitioned the Mayor
to lift.hi!l ()rder, arguing tha~ the requisition was illegal and would only delay the so}ution of the
problem an d create false hopes arnong ELSI workers ••.. The Mayor. <;iicl nqt respond (37). O n
19 Aprii, EL SI. appealed. t!le Mayor' s. orcier to the Prefect of Palermo, an official of the I talian
Governfuerit einpoweted t() bear appeals of decisions by local· govetrifuental officials (38). ELSI
argued th!l.t the requisition was iUeg!l.l and àrbitrary, and that the Mayor acted outside his
authority in requisitioning the plant (39). Although the Prefect ultimately held that the Mayor
had acteci unlawfully, he delayed issuing this decision for sixteen months, untilafter IRI had
completed its aéqu.isitìon . of EJ:.,SI)s · p}ant ~tnd asseti! (40).
. After havinr.C requìsitioned ELSI's planf and other tangible assets, ltalian authorities
presàured Raytheorito reopen ELSI at Ray-theon's own additional expense. On 19April 1968,
the President ofthe Sicilian Regìon told Raytheon representatives that the regionru and nationru
governmerits had agreed to forin a management company ti:> operate ELSI. · He propostid that
Rajitheon participate as a rriinority or equ!l.l partner with the govemment, · contribtiting substantial
new capitai to the venture and assuming complete tesponsibilìty for ELSI's past debts.
He proposed th!l.t thé new management company pay only a token rental (one Italian lira) for
ELSI's facilities; He irtdicatéd that this atrartgement would keep · ELSI workers temporarily
(30) Annex 26, para. 7; Article 7 of Law of 20 Mar. 1865, N. 2248, Attachment E (Annex 34). The requisition
was based indirectly on a 1955law establishing the Mayor's authority to issue « emergency and urgent orders •
of this character. Presidential Decree of 29 Oct. 1955, N. 6 (Annex 35).
( 31) Annex 33·
(32) Annex 21, paras. 18-19; Annex 26, para. 8.
(33) .1\1:\nex 26, para. 7.
(34) A.tmex 2(>, para. 7· The devastating effe<:t of the requisition is described by former Raytheon Controller
Joseph Scopelliti in Annex 17, para. 17:
« On Aprii r, however, the Mayor of Palermo requisitioned ELSI's plant and equipment; With the
requisition of ELSI's assets, it was impossible to invite potential buyers to view ELSI's facilities and discuss
the sale of the businesses. Moreover, in-process inventories could not be converted to finished prodùcts.
Suppliets and customers were thus suddenly and abruptly suspended. ELSI's hard-earned market position
was quickly taken away by competitors. Not only were the bulk of ELSI's assets suddenly not disposaole,
but it did not appear likely that Raytheon would ever regain control of them •. The requisition action ended
our chances of completing an orderly liquidation and obtaining a fair price for ELSI's businesses and assets ~.
( 35) Annex 21, paras. 19-:011. So far as Raytheon can determ.ine, the workers continued to have actual custody
of the plant during the requisition and consequent bankruptcy until the plant was finally reopened. lbid., paras.
20-21; Annex 26, paras. 16--17.
(36) Annex 26, para. 9·
(37) Annex 26, para. 9·
(88) Appeal by Raytheon-ELSI, S.p.A., to the Prefect of Palermo of Requisition Decree of the Mayor of
Palermo, 19 Apr. 1968 (Annex 36); See also, Annex 26, para. 9·
(39) Ibid.; At\nex 36. . .
( 40} See infra, p. 21. This delay in ruling appears to have been unprecedented. Annex 26, para. ro.
14 RASSEGNA DELL'AVVOCATURA DELLO STATO
employed until IRI set up its own plant in Palermo, emphasizing that Sicily had a " single goal,
to keep the workers employed (41) »,
The following day, the President of the Sicilian Region delivered to Mr. Oppenheim a
memorandum stating in part:
" On the premise that the intent of [Raytheon] is that of liquidating ELSI, I shall lièrein
explain the reasons why it is absolutely impossible that this can take place for the time being:
x) Nobody in Italy shall purchase, that is to say IRI shall not purchase neither for
a low nor for a high price, the Region shall not purchase, private enterprise shall not
purchase. Let me add that the Region and IRI and anybody else who has any possibility
to influence the market will refuse in the most absolute manner to favor any sale while
the plant is closed.
2) The banks which have outstanding credits for approximately x6 billion lire, cannot
and will not accept any settlement even at the cost of dragging the Company into litigation
on an international level. ..................................................... .
It is obvious that every attempt will be made (even at the cost of long litigation) to
obtain from Raytheon what is owed by ELSI.
4) In the event that the plant shall be kept closed, waiting for Italian buyers who
will never materialize, the requisition shall be maintained at least until the courts will have
resolved the case. Months shall go by (42) ».
The memorandum set forth a plan for keeping ELSI open temporarily, aiming toward
the liquidation of ELSI at a later time. After consulting with Raytheon officials, Mr. Oppenheim
fonnally rejected the proposal on 26 April, writing to the President of the Sicilian Regio n:
<< Regrettably your proposal to form a management company was a temporary caretaker
measure which would not solve the fundamental problem, namely keeping ELSI in Sicily
and making it a viable and vital industry. For this reason, we find it impossible to accept it.
It is sad to see that after all our investment over the years, and all our appeals during
the last year to public agencies and private industry to join us in putting new blood into
a Sicilian industry, the only responses were the requisitioning of our plant and a _proposal
which would only aggravate ELSI's criticai financial condition.
We are therefore forced to file a voluntary petition for bankruptcy, as required by
Italian law ... (43) »,
SECTION 3· - The Resulting Bankruptcy.
The President's memorandum made clear that the reqmsttlon of ELSI's assets would
continue indefinitely. Deprived of the income which the sale of its assets would produce, ELSI
was no longer able to meet its financial obligations when due. Its attorney advised the Board
of Directors to file for bankruptcy or face possible personal liability for company debts (44
).
(41) Minutes of Meetings in Palermo between Messrs. Joseph Oppenheim, Howard Hensleigh, Stanley Hillyer
and President Carollo of Sicily, 19-20 Apr. 1968 (Annex 37); Memorandum from the President of the Sicilian
Region, 20 Apr. 1968 (Annex 38).
(42) Annex 38.
(43) Letter from Joseph Oppenheim, Chairman of the Board, Raytheon-ELSI, S.p.A., to Hon. Vincenzo
Carollo, President of the Sicilian Region, 26 Apr. 1968 (Annex 39).
(44) Annex 9, para. 36; Annex 17, para. 19; Annex 26, para. 12; Annex 39; Affidavit of Charles H. Resnick,
Generai Counsel, Raytheon Company, paras. 4-5, 19 Jan. 1987 (Annex 40). Avv. Biscanti details in his affidavit
why the requisition forced ELSI to declare bankruptcy:
« On the day after we fìled the appeal to the Prefect, President Carollo of Sicily delivered a written memorandum
to Raytheon threatening that the requisition would be prolonged indefìnitely unless Raytheon abandoned
its plans to dose ELSI. I was informed of this immediately by Mr. Oppenheim. The disposability
of ELSI's assets was a fundamental prerequisite to ELSI's shareholders' ability to take ELS l through an
MEMORIA DEL GOVERNO U.S.A. 15
On 25 Aprii 1968, the Board of Directors accepted this advice and voted to file a voluntary
petition in bankruptcy (46). The bankruptcy petition, which was filed on 26 Aprii 1968, with
the Civil and Criminal Tribunal of Palermo, stated in part:
« On Aprii I, 1968 the Mayor of Palermo, alleging reasons of serious necessity and urgency,
ordered the requisition of the plant and of the equipment of the Company. Such measure,
which is considered by the Company illegal and arbitrary and moreover unfit to resolve the
the economie problem of the Company and of the Sicilian industry, has deprived the Company
of the freedom · to dispose of its assets for a long period, annihilating every possibility
for the orderly disposition of the corpora te assets; the negotiations then in course for the
disposition of part or all of the assets were prejudiced without recourse. Furthermore, in
the last few days there were clear and express indications of a line of behavior intended to
put the Company in even more serious difficulties.
Because of the order of requisition, against which the Company has timely filed an appeal,
the Company has lost the contro l of the plant an d cannot avail itself of an immediate source
of liquid funds;.in the meanwhile payments have become due (as for instance installments
of long-term loans; an installment of Lit. 8oo,ooo,ooo [US$r,28o,ooo] to Banca Nazionale
del Lavoro became due on Aprii 18, 1968 ..• ); it is aclmowledged that it is impossible for
the Company. to pay such sums with the funds existing or available and such impossibility
is due to the events of these last weeks (46) >>.
The Civil and Criminal Tribunal of Palermo found ELSI bankrupt on r6 May 1968, and
named Avv. Giuseppe Siracusa, a Palermo attorney, as Curator (hereinafter, « Trustee ») for
the bankruptcy (47).
orderly liquidation; they were relying on the proceeds of these sales in large part to pay ELSI's creditors
in an orderly manner. Without the ability to dispose of its assets, ELSI would not have the liquidity needed
to pay its debts as they carne due and therefore would soon become technically insolvent under Italian law.
Ali indications from the Italian Gòvernment were that the requisition would not be quashed in the near term.
Because ELSI's illiquidity and its consequent inability to meet its obligations when due were caused by the
requisition, and would continue, I advised ELSI's directors that they had an obligation to file a petition for
a dedaration of bankruptcy, failing which they could be held personally liable pursuant to Artide 217 of the
Bankruptcy Law, Royal Decree of March 16, 1942, N. 267. I had not previously contemplated such a step,
since I saw no possibility of its being required by ELSI's financial situation prior to the requisition. Given
the requisition, however, and the consequent inability to dispose of ELSI's plant and equipment, it was
evident that ELSI would no longer be in a position to satisfy regularly its obligations and pay its debts as
they carne due ».
(Annex 26, paras. II and 12). The text of Artide 217 of the Bankruptcy Law of Italy, Royal Decree of 16
Mar. 1942, N. 267, is attached as Annex 41.
( 45) Minutes of Meeting of Raytheon-ELSI, S.p.A., Board of Directors, 25 Apr. 1968 (Annex 42). See also,
Annex 40, paras. 4-5.
(46) Raytheon-ELSI, S.p.A., Petition for Bankruptcy to the Civil and Criminal Tribuna! of Palermo, p. 6
26 Apr. 1968 (Annex 43).
(47) Raytheon-ELSI, S.p.A., Judgment of Bankruptcy, Civil and Criminal Tribuna! of Palermo, decided
7 May 1968, deposited 16 May 1968, registered 17 May 1968 (Annex 44). The Tribuna! then appointed a fivemember
creditors committee induding two representatives of ELSI's labor force, two representatives of ELSI's
bank creditors, and a representative of Raytheon Europe. Documents filed in the Civil and Criminal Tribuna! of
Palermo designating Giuseppe Siracusa Trustee in Bankruptcy and selecting the creditors committee in the bankruptcy
of Raytheon-ELSI, S.p.A., 4 June 1968 (Annex 4s).
CHAPTER III
THE ACQUISITION OF ELSI'S ASSETS BY IRI
The Government of Italy publicly announced that it would take over ELSI's plant and
related assets through one of IRI's subsidiaries. Raytheon and Italian officials discussed
a possible agreement, but Italy broke off talks in November zg68. Notwithstanding its
decision to acquire ELSI's assets, IRI then boycotted the series of three auctions held by
the bankruptcy judge, while communicating directly with the trustee and the bankruptcy
judge to obtain different purchase terms than had been set for the auctions. Arguing that the
plant has been idle for a long period, an IRI subsidiary leased and soon thereafter purchased
ELSI's plant and most of its assets at afraction of their origina[ worth.
SECTION I. - Public Announcement of the Decision to Acquire ELSI's Assets.
On 25 July 1968, the Minister of Industry, Commerce and Crafts announced to the Parliament
that the Government of Italy intended to take over ELSI's plant through one of IRI's
subsidiaries (1). Until IRI's subsidiary was ready, ELSI's assets would be taken over by a new
company formed by the Sicilian Region and some government agencies (2). He also indicated
that ltaly was stili considering a general creditors' settlement outside the bankruptcy proceeding
es.)
Italian officials in fact met with Raytheon officers repeatedly from July to November 1968
to discussa possible plan fora government take-over that might include a creditor settlement (4
).
The parties tentatively agreed on a plan which by early November 1968 was dose to being
finalized. In the course of these negotiations, ali but one of the seven creditor banks agreed
to accept 30 %-40% of their unsecured claims. One bank decided that it would accept so%
in a settlement (5).
On 13 November 1968, however, the Government of Italy announced its decision that
an IRI subsidiary, IRI-STET, would « intervene, and take over ELSI's plant in Palermo (6
).
A senior Italian official confirmed five days later that Italy broke off nearly successful settlement
negotiations because it had decided to allow IRI to take over ELSI's assets without a creditor
settlement (1). On 30 November, former ELSI workers who had been occupying the plant
(l) Address by Minister of Industry, Commerce and Crafts, Andreotti, to the Italian Parliament, 25 July
1968 (Annex 46). He explained that this subsidiary would acquire «a suitable site » and make other preparations
to commence operations in Palermo, adding that « those familiar with situation in Palermo know that this is not
difficult ». lbid., at p. 3·
(2) Ibid., at p. 4· The pian announced by the Industry and Commerce Minister for Sicily to take over and
operate ELSI's facilities corresponds directly to the pian outlined by the President of the Sicilian Region, speaking
on behalf of the Italian Prime Minister, the day before the requisition. Supra, p. 12.
(3) Annex 46, at p. 4·
(4) Annex 26, para. 16; Annexes 27, 28 and 29.
( 0) Annex z6, para. x6; Annex 29. The United States is not claiming for damages based on this settlement
that fell through. The present claim is based on the assumption that Raytheon would bave paid so % to all of
the large creditor banks. lbid.
(6) Press Release by the Government of Italy, 13 Nov. 1968 (Annex 47); Annex 26, para. 16.
(7) Annex 29.
MEMORIA DEL GOVERNO U.S.A. 17
took down the plant's entrance sign that said • ELSI » and replaced it with a new sign that said
« STET (8) ». In December, IRI formed a new subsidiary in Palermo - Industria Elettronica
Telecomunicazioni, S.p.A. (« EL TEL ») - to take over ELSI's plant and assets (9).
SECTION 2. - The Acquisition of ELSI's Assets.
A) - IRI leases and re-opens ELSI.
The bankruptcy court ordered an auction of ELSI's plant and equipment for 18 January
1969, over eight months after ELSI was declared bankrupt, and seta minimum bid of 5 billion
lire (US$8,ooo,ooo) (1°). The Government of Italy had announced its decision to take over
ELSI's assets for its own use and no private parties bid at the auction (11).
By this time, ELSI's plant had been idle and occupied by former employees for over nine
months, and they were bringing pressure on the regional and national governments to reopen
the plant (12). As early as November 1968, government officials, as well as IRI, had promised
that an IRI subsidiary would take over ELSI's plant and rehire most of the former employees (13).
In attempting to reach an agreement on such reemployment, however, disputes arose between
employee representatives and IRI about timing (14). Four hundred of ELSI's workers marched
on Rome in early 1969 to protest the government's delay (15). IRI representatives and the Trustee
in bankruptcy reportedly agreed on 18 March 1969 that IRI would acquire ELSI's assets,
beginning with a lease of the plant for 150 million lire (US$24o,ooo), followed by a negotiated
purchase of the assets. This agreement, which was publicly reported, was reached in a meeting
with the Prefect of Palermo (1 6).
While these negotiations were taking place, the bankruptcy court held a second auction
on 22 March 1969, offering ELSI's assets for 6,223,293,258 lire (US$9,957,ooo) (17
). As with
the first, IRI boycotted this auction, and no other potential purchasers appeared (18). The
(8) Photograph of entrance to Elettronica Sicula, S.p.A. plant in Palermo, Sicily, 1962 (Annex 48); Photograph
of entrance to Raytheon-ELSI S.p.A. plant in Palermo, Sicily, Nov. 1968 (Annex 49).
(9) Annex 26, para. 20; «I.R.I. Breaks Its Promise- 2oo Workers Remain Jobless », L'Ora, s/6 Dee. 1968
(Annex so).
(10) Notice of Auction to be held 18 Jan. 1969, Corriere Della Sera, II Dee. 1968 (Annex 51).
(ll) Although several buyers expressed to the Trustee their interest in purchasing ELSI's assets, no buyers
appeared at the first auction. Minutes of 18 Jan. 1969 Auction of ELSI's Assets (Annex 52); Annex 26, para. 18.
As stated by Avv. Biscanti:
« [S]ince the Italian Government had made clear its decision to have one of its agencies acquire ELSI's
assets, potential purchasers had no incentive and received no encouragement to pursue their interest. Moreover,
during the time ELSI's plant was occupied by its employees, it would have been difficult for the Curator
to even show the assets ». lbid.
(12) Annex so; « CGIL: The Undertakings for ELSI Aie Not Being Fulfilled », Giornale di Sicilia, 8 Dee.
1968, p. 6 (Annex 53);« ELSI: Agreement Reached for Workers », Giornale di Sicilia, 30 Jan. 1969, p. 2 (Annex
54); « The 'EX' [Employees] of ELSI Protest in Rome», Giornale di Sicilia, 30 Jan. 1969, p. 5 (Annex 55);
« ELSI: Conclusive Meeting in the Prefecture •, Giornale di Sicilia, 19 Mar. 1969, p. 14 (Annex s6). The workers'
unions actively negotiated and lobbied the Government on their behalf. See Annex so. As discussed in these news
reports, IRI was represented in its negotiations for and acquisition of ELSI's plant and assets by SIEMENS,
one of its industriai subsidiaries, and by ELTEL, which ultimately purchased the plant and related assets. See,
e.g., Annexes so, 54 and 56.
( 18) Annex so.
(14) Annexes so, 53, 54, 55 and 56. IRI ultimately agreed to rehire the employees in phases over a one-year
period. See Annex s6.
(10) Annexes 55 and s6.
(16) Annex 56. The Prefect, who had pending before him ELSI's April1968 appeal of the requisition, activel.y
participated in the March 1969 negotiations between IRI, Sicilian officials and the Trustee in Bankruptcy for the
acquisition of ELSI's assets. Ibid. Despite his personal participation in IRI's acquisition of ELSI's assets,
~o~ever, the Prefect. delayed ruling that the requisition was illegal unti! August I 969, five months after the nego~
1at10ns were concluded and sixteen months after ltaly seized the plant but onl y forty days after IRI conci uded
Its purchase of the assets. Se e discussion infra, p. 21.
(17) Notice of Auction to be held 22 Mar. 1969, The New York Times, 5 Mar. 1969, p. 28 (Annex 57).
(18) Minutes of 22 Mar. 1969 Auction of ELSI's Assets (Annex 58).
18 RASSEGNA DELL'AVVOCATURA DELLO STATO
President of tbe Sicilian Region explained on 5 Aprii 1969 tbat EL TEL's decision not to bid
was part of a national government pian dating back to October 1968:
« [President Carolio] said: 'Tbere is an agreement: precise, written, and signed ' .... Tbe
agreement, as Carolio explained it last nigbt, entailed tbe acquisition of tbe factory by
IRI for tbe sum of four billion lire. I t was even agreed tbat IRI would be absent from tbè
first auction, participating instead in tbe second one, wbere tbe basic price was precisely
four billion lire. ... ' Wbat I am saying is so true - ' continued Carolio, ' tbat immediately
after tbis conversation tbe directors of IRI carne to Palermo in order to form EL TEL .
... Tbe trutb ... is tbat IRI (tbrougb EL TEL) bas continued to speculate on a lower
purcbase price, no longer bonoring its previous commitment; and it also bappened tbat
tbe consortium of creditors and tbe bankruptcy trustee backed out as weli, bringing up
tbe problem of tbe inventory to be acquired togetber witb tbe plant (19) >>.
A week after tbe second auction, EL TEL publicly proposed to tbe Trustee tbat it be
aliowed to lease and reopen tbe ELSI plant for an eigbteen-montb period at an annua! rental
cbarge of xso million lire (US$z4o,ooo) (2°).
Tbe creditors committeè met and expressed wbat tbe bankruptcy judge calied an << essentialiy
negative opinion >> of tbe proposed.lease (21), recotnmending tbat any sucb lease be limited
to six to twelve montbs and be granted only if ELTEL agreed to purcbase ali of ELSI's inventoried
raw materials for x.S billion lire (US$z,88o,ooo) (22). Raytbeon Europe's representative
on tbe creditors committee vigorously opposed this lease, in part because of tbe nominai payment,
but more fundamentaliy because it would discourage any potential competition for tbe purcbase
of ELSI's assets. As be elaborateci in a petition to tbe bankruptcy judge:
<< IRI, notwitbstanding tbe alieged commitments [to purcbase ELSI's assets], bas let two
sales go unattended witb tbe obvious purpose of causing in sucb way tbe price to become
lower. Tbe attitude of IRI leads one to suspect tbat this maneuver sbali continue for severa!
montbs until sucb time as tbe price of tbe plant, because of the reductions tbe law permits
(but does not require), will go down to sucb a low value tbat tbe solution of the serious
social problem represented by one tbousand Elsi workers may also convert itself into an
enormous bargain for IRI and into an enormous damage to ELSI creditors ....
It is impossible to see wbat benefit there may accrue to tbe creditors from tbe lease. On
tbe contrary, it appears tbat tbe lease can only cause damage to tbe creditors because EL TEL,
once it bas obtained possession of tbe plant - notwitbstanding tbe provision tbat may be
included in tbe lease agreement tbat in tbe event of purcbase of tbe plant or part tbereof
by tbird parties tbe same sbali be terminated - sbali bave presumably no interest in
purcbasing tbe plant or, in any case, it sbali bave no urgency to purcbase it and a consequence
of ali tbis sball be tbat, tbrougb successive auctions, tbe price sball be reduced to
sucb a point as to depredate completely tbe ELSI plant. On tbe otber band, a private group
whicb migbt stili think of purcbasing tbe plant or part thereof, knowing of tbe aforementioned
decision of tbe I talian Government an d knowing tbat IRI is also in tbe possession
of tbe plant, can only be absolutely discouraged even from taking into consideration sucb a
possibility.
[Moreover, tbe lease] sball make it impossible [for tbe liquidator] to seli tbe inventory at
any reasonable price.
(19) « 'There Was an Agreement' Says Carollo », Giornale di Sicilia, 6 Apr. 1969 (Annex 59).
(20) Minutes of Raytheon-ELSI, S.p.A., Creditors Committee Meeting, 29 Mar. 1969 (Annex 6o); Submission
by Trustee in Bankruptcy Giuseppe Siracusa to the Civil and Criminal Court of Palermo, 3 Apr. 1969
(Annex 61). As noted supra, p. 17, this lease arrangement was reportedly arranged in advance of the creditors
committee meeting by IRI and the Trustee, in the presence of the Prefect. Annex 56.
( 21) Annex 61, p. 3·
(22) Annex 6o, p. 2.
MEMORIA. DEL GOVERNO U.S.A. 19
[I]nventory can be sold at a reasonable price only to whomever uses the plant; therefore,
if the inventory is separated from the plant and if an attempt is made to sell the inventory
separately, the only result shall be that the inventory will be sold as scrap or that it may
be absolutely impossible to sell a substantial part thereof (23) )).
Notwithstanding the views of the creditors committee, the Trustee recommended and the
bankruptcy judge agreed to gràrtt EL TEL the lease on the terms it requested (24). Raytheon
Europe's appeal of the lease to the Cìvil atid Ci:imìnàl Tribunal of Palermo was denied on 9
May 1969, primarily on the ground thàt the lease could preserve the already reduced value
of ELSI's assets, which had remained unused becàuse of the requisition (26).
B) IIU acquires ELSI's work in process.
In Aprii 1969, ELTEL proposed .to buy ELSI's work in process - materialleft on production.
lines when the plant. was requisitioned --:-- for 105 million lire (US$168,ooo). The
creditors committee met on 2 May 1969 to consider this offer, which was for about 48% of
the 217 million lire (US$347,200) at which this material had been inventoried and appraised (26).
Raytheon Europe's representative on the creditors committee opposed ELTEL's offer because
i>f this low price and other grounds, arguing o in part that the sale should not be considered
prior to the auction proceedings. scheduled for early May 1969 (27). The other members of the
committee agreed to the sale despite EL TEL's low offer, in part because this inventory had
already been sitting unused for over 12 months (28).
On 3 May 1969, IRI boycotted the third auction of ELSI's assets held by the bankruptcy
judge (29
). ELTEL had notified the bankruptcy court on 16 Aprii that it wanted to buy the
plant and equipment only and not the supplies, « since these are not indispensible for administration
)). EL TEL indicated that it would bid at the third auction if it could make a bid of
3.2 billion lire for the plant and equipment only- rather than for the plant, equipment, inventory
and supplies (30). The court, however, di d not change the terms of the auction an d EL TEL
did not bid. No other bidders appeared either (31).
On the same day as the third auction, however, the Trustee petitioned the bankruptcy
judge to approve the sale of ELSI's work in process to ELTEL for the exact price ELTEL had
offered, reasoning that the reduced price was justified by the long period of plant inactivity
(23) Brief to the Civil and Criminal Tribuna! of Palermo from Avv. Giuseppe Bisconti, 8 Apr. I969, pp. 4-7
(Annex 62).
(24) Submission to Civil and Criminal Tribuna! of Palermo by Avv. Giuseppe Bisconti, 10 Apr. I969, pp.
3-5 (Annex 63). In justifying his recommendation, the Trustee noted:
~ The rental of Lire I so,ooo,ooo per yèar, considered abstractly, is neither adequate nor remunerating, however
if it is related to the obligation<> which the lessee shall undertake to safeguard the integrity, and to maintain
also for the future, of the value of the plant, it shall on the other hand result to be definitely convenient •.
Ibid., at p. 4·
(26) Decree of the Civil and Criminal Tribuna! of Palermo, 9 May I969 (Annex 64).
(26) Minutes of Creditors Committee Meeting, Raytheon-ELSI, S.p.A., 2 May I969 (Annex 65).
(27) Annex 65. Raytheon Europe's representative stated that IRI was simply pursuing its « well thought-out
pian which is, in essence, geared to a maximum devaluation of ELSI's business from which EL TEL alone would
benefit •. Ibid., at p. 3·
(28) Ibid., at pp. 3-4; Annex 26, para. 22. To Raytheon's knowledge, this materia! was not offered to any
other purchasers, since the plant and its assets were offered as a single package for everyone except IRI. lbid.
(29) Notice of Auction to be held 3 May I969, The New York Times, 8 Apr. I969, p. 71 (Annex 66); Minutes
of 3 May 1969 Auction of ELSI's Assets (Annex 67). The bankruptcy judge set a price of 5 billion lire
(US$8,ooo,ooo) at this auction. The disparity in prices among the first three auctions arises in part because the
bankruptcy judge slightly varied the particular assets that were offered at each auction in addition to ELSI's plant.
See Annexes SI, 57 and 66.
( 80) Submission to the Civil Court of Palermo by ELTEL, S.p.A., I6 Aprii I969 (Annex 68).
( 81) Annex 67.
20 RASSEGNA "DELL'AVVOCATURA DELLO STATO
and by EL TEL's lease of the plant (89). The Court approved the sale at the price set by
ELTEL (33).
C) - IRI completes its acquisition of ELSI's assets.
Having acquired contro} of ELSI's plant through the lease and ownership of its work in
process, EL TEL quickly negotiated a price to its liking for ELSI's remaining assets.
On 27 May 1969, EL TEL submitted to the bankruptcy judge its o:ffer to buy the remaining
plant, equipment and supplies for 4 billion lire (US$6,4oo,ooo) (34). The Trustee proposed
to the creditors committee that it accept this offer, subject to some minor changes (36). The
committee considered the proposal, as modifìed, on 6 June and approved it by a split vote (36).
On 7 June the bankruptcy judge scheduled an auction for 12 July 1969 on the agreed terms (37).
Mter Raytheon Europe unsuccessfully appealed the judge's decision to sell ELSI's assets to
EL TEL (38), EL TEL appeared at the fourth auction and purchased ELSI's plant and remaining
assets (39). The Civil and Criminal Tribuna! of Palermo approved this purchase and assigned
ELSI's remaining assets to ELTEL the next day (40). Thus, on 12 July 1969, ELTEL fìnally
completed its purchase of ELSI's assets for 4.oo6 billion lire (US$6,409,6oo), a price it had
essentially determined eight months earlier (41).
The Government of Italy thus achieved its objective of acquiring ELSI's plant and other
assets without paying or otherwise cooperating with ELSI's shareholders, Raytheon and
Machlett, and without paying a freely market-determined price. IRI's subsidiary Italtel, S.p.A.,
now uses ELSI's plant to manufacture telephone equipment (42).
(32) Submission to the Civil and Criminal Tribuna! of Palermo by Trustee Giuseppe Siracusa, 3 May 1969,
subsequent order by the Tribuna!, 5 May 1969 (Annex 69). The Trustee stated:
• According to the lease agreement the undersigned [Trustee] is obligated to remove the materia! in question
which removal costs a considerable amount of money and time and results in a substantial reduction in value
of the materia! proper .... In view of the fact that the materia! is one year old and difficult to sell while its
removal from the assembly line would only reduce its value, the undersigned is in favor of selling it for,
L. 105,ooo,ooo » (Annex 69).
( 33) Annex 26, para. 22; se e also, Transcript of Bankruptcy Hearing, Civil and Criminal Court of Palermo
13 July 1969 (Annex 74).
( 34) Submission to the Civil Court of Palermo by ELTEL, S.p.A., 27 May 1969 (Annex 70). This offer,
which was accepted, was the price reportedly negotiated by IRI and the Trustee eight months earlier, in October
1968 (Annex 59). Earlier in May 1969, ELTEL apparently attempted unsuccessfully to get an even lower price
for the assets. Two days after the third auction, on 5 May 1969, ELTEL submitted to the bankruptcy judge its
own appraisal of ELSI's plant and the other remaining assets at 2.381 billion lire (US$3,809,6oo). Annex 26,
para. 23.
(36) Minutes of Creditors Committee Meeting, Raytheon-ELSI, S.p.A., 6 June 1969 (Annex 71).
(36) Ibid. The two ELSI cmployee representatives voted in favor, the representative of generai creditor&
abstained, the bank representative was absent, and the Raytheon Europe representative voted against the proposal.
Ibid.
( 37) Notice of Auction to be held on 12 July 1969 (Annex 72).
( 38) Annex 26, para. 24.
(39) Ibid. To encourage ELTEL not to prolong any further its efforts to secure ELSI's assets at an even
lower price, Raytheon Company agreed in late }une 1969 to extend to ELTEL a license for its existing ltalian
patents and certain proprietary information. Letter from Joseph Oppenheim, Vice President, Raytheon Company,
to Industria Elettronica Telecomunicazioni, S.p.A., 26 June 1969 (Annex 73).
(40) Annex 74·
( 41) Annex 59·
• ( 42) See I.R.I., Istituto per la Ricostruzione Industriale, 1985 Yearbook, pp. 260-263 (Annex 75). Italy
ts thus using ELSI's plant to produce one of the new products proposed by ELSI in its 1967 Report to ltalian
officials. Annex 22, p. 28; Annex 15, para. 64.
CUAPTER IV
SùBSEQÙENT rÌ'ALIAN COURTACTION
After JRI had completed its purchase of ELSI's assets, the Prefect finally ruled that
the requisition had been illegal. The Trustee then sued the Mayor and ltalian Interior
Ministérfor damages based>on this ruling, but was awarded only damages for ,[oss of
possessi.on · during the requisition; · Fi'Qe government-controlled l banks sued Raytheon ·. in
ltalian courts to recoverfor the unsecured, unguaranteed loans they had made to ELSI.
All of these suits resulted in judgments for Raytheon. Bankrujitcy proceedings were
completed in I 98 s, with secured an.d preferred creditors receiving payment · in full and
unsecured creditors' receiving only a small jraction of the amounts they had claimed;
SEC'i't.ò~ . 1. .., Tne .lllega.lity of ihe RequisÌtion . and Aftermath.
As noted above (l), on 19 Aprii 1968, ELSI appealed the Mayor's I Aprii 1968 requisition
of its assets to the Prefect of Palermo, an offi.cial of the Italian Government empowered to hear
appeals of decisions by local governmental officials. The Prefect ruled on ELSI's appeal of the
requisition order on 22 August 1969, over sixteen months after the appeal was filed, but only
40 days after ELTEL had completed its acqu:isìtion of ELSI's assets (2
). The Prefect found
the ·• requisition to havé · been illegal, ruling . that . it èould. not possibly have · achieved its stated
purposes (3). Specifica:lly, the Prefect ruled • that « the order is destitute of atiy juridical cause
which may justify it or make it enforceable (4) ». , .
The Mayor appealed the Prefect's Order to the Italilin Council of State and the President
of Italy (6). His appeal\vas dismissed on the ground that be lacked standing to appeal a decision
of the Prefect, his adrillriistrative superior(6)' The Prefect's ruling therefore stands as a final
decision of ltalian judicial authorities that the requisition was unlawful.
.· .. The Prefect's delay in ruling on ELSI's appeal of the requisition was apparently unprecedented.
In other cases in which the 1865 law had been invoked as a basis for requisition of
ari indt1strial plant, the Prefect of the relevaritjurisdiction quickly quashed the requisitions (1).
In most of these cases, the requisitions were quashed in less than thirty days, sometimes in as
little as one day (&).
Based on the Prefect's decision, the Trustee brought suit on behalf of ELSI's bankrupt
e~tate 011 r6 Junt} · ~97P in tht} COutt of Palermo against the Minister of the I11terior of Italy
and the Mayor of Palermo for damages to ELSI resulting from the illegal requisition (9
). In
(1) Supra, p. 13.
(2) Judgment of Prefect of Palermo, 22 Aug. 1969 (Annex 76).
(3) lbid., pp. xo-·n.
( 4) Annex 76, p. I x. The Prefect noted that the Mayor's actions were motivated in part by his desire to
show the local press that he was « fac[ing] the problem in some way •. Ibid., p. n.
(G) Council of State]Opinion Regarding Appeal by Mayor of Palermo, 19 Nov. 1971 (Annex 77); Ruling
by President of Italy Dismissing Appeal by Mayor of Palermo, dated 22 Apr. 1972, registered 19 May 1972 (Annex
78).
( 6) Ibid.
(7) Annex 26, para. xo.
(8) Ibid. In none of these cases did the Prefect delay his ruling for more than thirty days. Ibid.
(9) Annex 78.
22 RASSEGNA DELL'AVVOCATURA DELLO STATO
his complaint, the Trustee stated that the requisition had not only caused ELSI's bankruptcy,
but had also impeded its success:
« In consideration of the heavy legai and economica! situation created by the appealed
order of requisition, Raytheon-Elsi S.p.A. was obliged to file for bankruptcy, which was
declared by decision of this Tribuna! on May 7-9, I968.
Even after the declaration of bankruptcy the Trustee in bankruptcy, Avv. Siracusa, could
not take possession of the plant and relative equipment due to the order of requisition
issued by the Mayor of the City of Palermo, which remained in e:ffect until September 30,
I968, causing unimaginable damages for the bankrupt company and, therefore, for the
creditors (10) >>,
The Trustee sought damages of 2.395 billion lire (US$3,834,500) plus interest for the
decrease in value of ELSI's plant and electronic equipment during the requisition, and for
ELSI's inability to dispose of the plant and equipment during the requisition period (11).
On 2 February I973, the Court of Palermo ruled that the Trustee was not entitled to
compensation for the requisition (12). On appeal, the Court of Appeals of Palermo found on
24 January I974 that the Trustee was entitled at least to compensation from the Minister of the
Interior for loss of use and possession of ELSI's plant and assets during the six-month requisition
period. It therefore awarded, in effect, a « rental >> payment of some I I4 million lire
(US$I7I,ooo), computed as half the annual rate of five percent of the total value of the assets (13).
This decision was upheld on appeal by the Supreme Court of Appeals on 26 Aprii I975 (14).
The amount of the judgment was ultimately received by the Trustee and, less costs and expenses,
distributed to ELSI's creditors (15).
SECTION 2. - Italian Bank Suits Against Raytheon.
Upon demand, Raytheon Company paid 5.7876 billion lire (US$9,283,6oo) as payment
in full of those of ELSI's bank loans that it had guaranteed (1 6). Seven banks had made unguaranteed
loans to ELSI that were outstanding on I Aprii I968, when Italy requisitioned ELSI's
plant and assets (17).
Between I969 and I97I, five of these banks that were owned or controlled by IRI or the
Sicilian Region filed suits against Raytheon in I talian courts to recover the loans they had made
to ELSI (18
). All of these lawsuits resulted in judgments in favor of Raytheon after many years
(10) Lawsuit for damages filed by the Trustee against the Minister of the Interior and the Mayor of Palermo,
16 June 1970, p. 2 (Annex 79).
(11) The suit was brought by the Trustee seeking compensation for the bankruptcy estate. It was not brought.
nor could it have been brought under Italian law, on behalf of ELSI's shareholders, Raytheon and Machlett,
Annex 26, para. 28.
(12) Judgment of the Court of Palermo, decided 2 Feb. 1973, filed 29 Mar. 1973, registered 4 Apr. 1973
(Annex So).
(13) }udgment of the Court of Appeals of Palermo, registered 24 }an. 1974, p. 24 (Annex 81). The United
States dollar equivalent in the text is derived from the exchange rate on 24 Jan. 1974 of United States $x.oo
to Italian L. 666.667 (Annex 12).
( 14) Judgment of the Supreme Court of Appeals, 26 Apr. 1975 (Annex 82). The Court determined that
the Court of Appeals incorrectly computed the damages owed to the Trustee, but that the decision was nonetheless
« equitable >>. Ibid., p. 6.
(16) Annex 26, Attachment.
(16) Annex 13, para. 29 and Schedule Il; Annex 14, Exhibit B. This total includes principal and interest,
as detailed in Annex 13, Schedule Il.
(17) Annex 13, Schedule D.
(18) The following banks filed suit against Raytheon in Italian courts on the dates indicated in parentheses:
Il Credito Italiano (7 May 1969), Banco di Roma (23 June 1969), Banca Commerciale Italiana (15 January 1969),
Banco di Sicilia (13 March 1970), and Cassa Centrale di Risparmio V.E. (18 July 1970). IRI controls the first
three of these banks. Banco di Sicilia and Cassa Centrale di Risparmio V.E. are government-controlled banks
which have their headquarters and primary piace of business in Sicily. Two of ELSI's unguaranteed creditors,
IRFIS and First National City Bank of New York, did not sue Raytheon. President Carollo of the Sicilian Region
had explicitly threatened that Raytheon would be subjected to this type of litigation if ELSI's shareholders decided
t o close ELSI and take i t through an orderly liquidation (Annex 38).
MEMORIA DEL GOVERNO U.S.A. 23
of litigation (19). The courts dismissed the banks' claims that Raytheon had guaranteed the loans
and, in keeping with well-established precedent, held that Raytheon's interest in ELSI did
not make it a « sole shareholder" that could be held liable for loans to ELSI (2°). Ali of the
decisions totally cleared Raytheon of any explicit or implicit misconduct with respect to
ELSI (21).
SECTION 3· - The Conclusion of the Bankruptcy Proceedings.
In the bankruptcy, creditors presented claims against ELSI totalling some 13 billion lire
(US$zo,ooo,ooo) (22). Raytheon and one of its subsidiaries, Raytheon Service Company
(« RSC "), had unsecured claims against ELSI of some 1.14 billion lire (US$x,83o,ooo) for
goods and services they had advanced to ELSI on unsecured open accounts (23). On advice of
Italian counsel, however, Raytheon and RSC did not file claims in the bankruptcy proceeding
because it was clear that they would not receive enough in the bankruptcy to justify their filing
costs (24).
The bankruptcy proceedings closed in November 1985.
According to the bankruptcy reports, the bankruptcy realized only some 6.37 billion lire
(US$xo,xgz,ooo) for ELSI's assets, as compared with the minimum liquidation value of 10.84
billion lire (US$x7,344,ooo) (25). Of the amount realized, some 6.o8 billion lire (US$9,728,ooo)
went to pay banks, employees, and other creditors (26). The remainder went to pay bankruptcy
administration, tax, registry, and customs charges. Ali of the secured and preferred creditors
who filed claims in the bankruptcy were paid in full. The unsecured creditors received less
than I % of their claims (27).
(19) Annex 26, para. 26.
(20) lbid.
(21) Ibid.
(22) Ibid., Exhibit A; Annex 30, Schedule D.
(28) Annex 13, Schedule D; Annex 14, Exhibit C; Annex 26, para. 14. Raytheon Service Company is a
United States corporation incorporated in Delaware and wholly owned by the Raytheon Company. Annex 13,
para. 31. Certificate of Good Standing, State of Delaware, Raytheon Service Company, 22 Dee. 1986 (Annex 83);
Proof of Raytheon Company's 100% ownership of Raytheon Service Company, 8 Oct. 1986 (Annex 84).
(24) As Avv. Bisconti explains:
« Under Italian law, the filing of documents supporting a claim in bankruptcy may be subject to a registration
tax, the amount of which is a percentage of the claim and varies depending on the nature of the claim. lf
Raytheon and RSC had filed in bankruptcy, they would have paid a substantial tax. Given ELSI's many
secured creditors, the likelihood that the full value of ELSI's assets would not be realized in the bankruptcy
proceeding, and the costs of the bankruptcy, I advised Raytheon and RSC not to file claims at the time.
Under Italian law, it would have been possible for them to file such claims at a later stage in the proceedings
and participate in distributions subsequent to their filing. As the bankruptcy proceeded to a conclusion,
however, it became very apparent that Raytheon and RSC would not recover enough in the bankruptcy
to justify the costs of filing. On my advice, therefore, these companies did not file in the bankruptcy ».
Annex 26, para. 14.
(25) Annex 13, Schedules C1, C2, C3 and C4; Annex 26, Exhibit A; Annex 30, para. 6 and Attachment B.
(26) Annex 30, Attachment B, Schedule A.
(27) Annex 26, Attachment; Annex 30, Attachment B.

PART III
THE JURISDICTION OF THE COURT
Jurisdiction is based on Artide 36(1) of the Statute of the Court, as read in conjunction
with Artide XXVI of the 1948 Treaty of Friendship, Commerce and Navigation (the « Treaty »)
between the two countries (1). Artide 36(1) expressly recognizes the ability of parties to the
Statute- such as Italy and the United States- to provide by treaty for the Court to exercise
jurisdiction over specified matters. In Artide XXVI of the Treaty, Italy and the United States
agreed that:
« Any dispute between the High Contracting Parties as to the interpretation or the application
of this Treaty, which the High Contracting Parties shall not satisfactorily adjust by
diplomacy, shall be submitted to the International Court of Justice, unless the High Contracting
Parties shall agree to settlement by some other pacific means ».
As a result of the requisition and subsequent bankruptcy of ELSI, and related actions as
described in the Statement of Facts above, a dispute arose between Italy and the United States
concerning the interpretation and application of the Treaty and its 1951 Supplement (2
). The
Government of the United States contends that Italy's actions have violated a number of
provisions of the Treaty and Supplement, as detailed below. The Government of Italy, however,
has denied this contention.
This dispute has not been « satisfactorily adjust[ed] by diplomacy ». As detailed in Attachment
2 of the Application submitted by the United States in this case, the Governments of
the United States and Italy have attempted to resolve this dispute by diplomatic means for many
years without reaching any mutually satisfactory agreement. Finally, in the fall of 1985, the
two governments agreed in principle that a contentious proceeding under the Treaty would
be an appropriate means of resolving the dispute (3). No efforts at settlement are pending.
(l) Annex r.
(2) Artide IX of the Supplement provides that it shall « constitute an integrai part of the said Treaty of
Friendship, Commerce and Navigation •· Annex z.
(') Either party has, of course, a unilateral right to invoke the jurisdictional provisions of the Treaty. See,
e.g., United States Diplamatic and Cansular Staff in Tehran, judgment, I.CJ. Reparts 1980, pp. 26-z7, in which
jurisdiction was premised, inter alia, on the unilateral invocation of Artide XXI(z) of the 1955 Treaty of Amity.
Economie Relations, and Consular Rights between the United States and Iran, 284 UNTS 93, which contained
linguage virtually identica! to that contained in Artide XXVI of the Treaty between the United States and Italy,

PART IV
THE CLAIMS OF THE UNITED STATES
CHAPTER I
INTRODUCTION
Pursuant to the Treaty and its Supplement, Italy assumed a number of specific obligations
to protect investments made by United States nationals in its territory. A major purpose of
this Treaty was to encourage investment by nationals of one country in the economy of the
other, by creating a code of fair treatment for the protection of foreign investors (1). Thus,
the Treaty contains numerous specific and interrelated provisions for the protection of foreign
investors, reflecting the parties' fundamental intention to provide a framework which would
foster a favorable climate for investment (2).
As stated in the Majority Report to the Italian Senate on the Treaty:
« The underlying principles are simple and fundamental. Full respect for the respective
sovereignty and full equality between the two parties, and consequently reciprocity of
treatment; systematic application of the most-favored-nation principle and thus mutuai
granting of the most-favored treatment to the foreign citizens and foreign interests;
a spirit of friendship in the implementation of the Treaty, goodwill when the precise
provision cannot be satisfied, fair play [so in Italian] in ali cases (3) "·
(l) As noted in the Majority Report to the Italian Senate:
« there is nothing here that could create conditions of privilege, that is not justified un der la w an d equity,
and that does not correspond to the same interest on the part of the Italian economy. The latter has a need,
indeed an urgent need, for foreign capitai. Certainly these generai dispositions are not sufficient in themselves
to hasten the influx, but there remains the appropriateness of these precautionary measures against any
possible creation of persecutory or discriminatory conditions >.
Senate of the Republic, Bills and Reports- 1948-1949, N. 344-A, Report of the Majority, p. 9, Sent to the Office
of the President on 28 May 1949 (Annex 85).
( 2) « [T]his is a genera! treaty, .... It is thus a framework that determines in a definitive, organic and lasting
way the relations between the citizens of the two countries and the legai status that each country grants to
citizens of the other country living o n its territory •.
Ibid., p. 2.
As a leading commentator points out:
«In a rea! sense, therefore, the FCN treaty as a whole is an investment treaty; not a mosaic which merely
contains discrete investment segments. It regards and treats investment as a process inextricably woven
into the fabric of human affairs generally; and its premise is that investment is inadequately dealt with unless
set in the total ' climate ' in which it is to exist .... These treaties focus, in fundamental terms of enduring
value over the long range, upon the line between policy favorable and policy unfavorable to foreign investment:
namely, hospitality to and equality for the foreigner under the law, and respect for his person and his property
>).
H. Walker, « Treaties for the Encouragement and Protection of Foreign Investment: Present United States
Practice >, 5 American J ournal of Comparative Law, p. 229, at pp. 244, 247 (1956).
( 3) Annex 85, pp. 2-3. See also, Commerciai Treaties: Hearings Before the Special Subcommittee on Commerciai
Treaties and Consular Conventions, Committee on Foreign Relations, United States Senate, 82d Cong., 2d
28 RASSEGNA DELL'AVVOCATURA DELLO STATO
As described by the United States Department of State, the Treaty was « designed to assure
to economie enterprises the ability to operate in a foreign country on a basis of true competitive
equality with local concerns (4
) "·
Sess., p. IS (I952) (Annex 86). For the United States, this reflected a significant shift in emphasis after World
War II:
« Perhaps the most important respect in which the current [post war] treaties differ from those of the twenties
and thirties is the greatly increased emphasis on the encouragement of American private investment abroad,
by the expansion and strengthening of provisions relating to the protection of the investor and his interests ».
Annex 86, p. 4 (Remarks of Harold F. Linder, Deputy Assistant Secretary of State for Economie Affairs).
Materials from ratification proceedings in the United States Senate are cited herein, together with comparable
materials from Italian interna! ratification proceedings, to demonstrate that the two parties had a common understanding
of the meaning and purpose of the Treaty. Standing alone, such internai ratification proceedings cannot,
of course, bind another party.
( 4) «Commercia! Treaty Program of the United States », Department of State Publication 6565, Commercia!
Policy Se<ies 163, p. 2 (Jan. I958) (Annex 87).
CHAPTER II
INTERFERENCE WITH THE MANAGEMENT AND CONTROL OF ELSI
SECTION x. - Article III of the Treaty.
Artide III of the Treaty guarantees that nationals of either party may participate in corporate
enterprises orgariized under the other's laws. Artide III(x) provides rnost-favored nation
treatment to United States nationals, induding corporations, to organize and participate in
Italian corporations (l), It also provides that Italian corporations controlled by United States
nationals shall ef\Ìoy most-favored nation treatment with respect to exercising the functions for
which they were created.
Artide III(z) extends further guarantees of treatment in the case of corporations engaged
in most activities (9) :
" The nationals, corporations and associations of either High Contracting Party shall be
permitted, in conformity with the applicable laws and regulatìons withìn the territories of
the other High Contracting Party, to organize, contro/ and manage corporations and associations
of such other High Contractìng Party for engaging in commerciai, manufacturing,
processing, minìng, educatìonal,. philanthropic, religious and scientific activities » (Emphasis
added).
Like Artide III(x), Artide III(z) specifically addresses both the rights of United States
persons seeking to invest in Italian corporations and of the Italian corporations which they
contro!. Paragraph 2 provides in its first sentence that United States investors shall be permitted
to «.organize, contro! and manage » Italian corporations engaged in, inter alia, commerce and
manufacturing, subject only to the requirements established by local law (3). This provision
(l) Artide III(1) provides that foreign corporations:
« shall enjoy, .•. rights and privileges with respect to organil!:ation of and participation in corporations and
associations of such other High Contracting Party, ... in cortformity with the applicable laws and regulations,
upon terms no less favorable than those now or hereafter accorded to nationals, corporations and associations
of any third country ».
Italian corporations so organized :
« and controlled by such nationals, corporations and associations, shall be permitted to exercise the functions
for which they are created or organized, in conformity with the applicable laws and regulations, upon terms
no less favorable than those now or hereafter accorded to corporations and associations that are similarly
organized or participated. in, an d controlled, by nationals, corporations and associations of: any third cp:untry ».
(9) Because each country had restrictions on the rights of aliens to .establish and manage compai).ies engaged
in certain activities, Italy and the United States were not able to make the broader protection of Artide Ill(z)
universal. The activities enumerated reflected those in which neither country had any domestic legal impediments
to conferring an unqualified right on the other's nationals to organize, manage and control corporations or associations.
Artide III(z) further provides that corporations so organized, which are: .
« controlled by nationals, corporations and associations of either High Contracting Party •.. shall be permitted
to engage in the aforementioned activities therein, in conformity with the applicable laws and regulations,
upon terms no less favorable than those now or hereafter accorded to cor.porations and associations of such
other High Contracting Party controlled by its own nationals, corporations and associations» (Emphasis added)
(3) This qualification should be construed to permit regulation of the exercise of management and control.
but not abrogation of that right. As noted by Walker, the phrase «in conformity with applicable laws and regulations
», as it occurs in this Treaty, « is framed in such a manner as to imply that it does not constitute a reservation
detracting from the Treaty right; and such phraseology has been omitted from subsequent treaties ». H. Walker,
• Provisions on Companies in United States Commerciai Treaties », so American J ournal of Jnternational Law,
p. 373 at p. 384, n. 53 (1956). In view of the possible ambiguity of this qualification, however, the Supplementary
Agreement provided stronger protection by absolutely prohibiting arbitrary and discriminatory interfer.ence, whether
or not in .accordance with locallaw. See Section z, infra.
.30 RASSEGNA DELL'AVVOCATURA DELLO STATO
recognizes the need for conformity with loc!ll Iaw, but does not referto treatment «no less favorable
» than that accorded to corporations owned by local nationals. It is by its terms something
other than a guarantee of national treatment. It is, rather, a guarantee of non-interference with
management and contro!. United States 11ationalr;; Kshall be permitted >> to organize, manage
and c.ontrol Italian corporations without impediment or interference, except for the requirements
or constraintalmp~ed. by law; Thir;; g~aràntee ellcourages investment; by assuring investors
of their freedom t;o manage and protect their investment.
Italy thus has an obligation. to the Unìted States under Article Ill(z) to allow Unite d States
corporations to organize, manage, and control Italian corporations operating in certain specified
areas without governmental intervention, except for .such conditions and regulations as are
established by law.
< ':['his obli,gl:l~ioJ)c x:e~~cts ·l:l. par#cu}ar. emphasit~, ip the Treaty as a w ho le, o n the importance
ofassuring lllllllv~s~Qt<thl.\t. ol)çe be i11vests in a cornpany in the other country, he will receive (air tp~a~t:nt: · · · · · · · · · · · · · · · · · · ·
«[T}hete <:an be little in the way of e:ffective promotion [of investment] unless there is
efiective· protecti()n; for new capitai is unlikélyto venture where existing capitai is ill-treated.
Hence the ernphasis on the protective fe11ture of the treaty provisions on investments is
// essentially amatter .of.placing first · things first (4) »;
'J'he first artiçlet~ of the Treaty, the SO-:-Clllled (( establishment )) provisions, are particularly
impohaniin this ~~gai;<l (3), A,$ stated i1:1jhe MaJol"ity E.eport to the ltalian Senate:
~ The. fir!i~ ~rrl~Ies,• • '\'\Thi~h ar~ • the .mo~t import~t'lt. ~n~s, guarantee to citizens of the other
party; to jutidìcal persons; commerciai .companies,. entetprises an d associations consti tu te d
·by them; the•exercise of. commercial.andnon,-cclrimercial activities in the widest sense.
Full rights, then, to any activity, to acquisition, possession, administration of movable and
.• ~eal propert;y; toorgl:llliz,e, direct, manage coml'anies, ..•. etc~ (6
) ».
• . .· The UnlJed Sta.tes'submits t;hat the req1Jisitiori of ELSI's plant and related assets constituted
a:rt iri.tetféfenctfwith Raythecm's and Machlett's niai1agement and control of ELSI which
was not iii àçc()!.'dance wìth applicable law, in•viòlation: ·of Miele III(z) of the Treaty. Siri.ce
Raytheon aiitf iVIa:C:hlett are iri.corpòrated in the Uhited States, they are United States corpora•
tions for purposes of the Treaty (1). ELSI was an ltalian corporation engaged in manufacturing
and commerce - two of the activities enumerateci in Article III(z). The Government of Italy
thus was obligated by Article III(z) not to interfere with Raytheon and Machlett's management
an(l control ofEJ..~J~ )'Vhile ELSJvva~ ~u'bject under that prgvision to generally applicable
Xtalian law, the Mayor of Pal~rmo'$ re@isition was coptrary to that Iaw (8).
This unlawful requisition had the purpose and effect of disrupting Raytheon's and Machlett's
continued mana!,lement and contro! of ELSI. .In early 1968,. following a year of serious but
unsuccessful etfqrtl! to .. improve ELSI's profitability, Raytheon and Machlett - which had yet
to receive ·. any. retut:ri. o n. their capi tal .. --,- decided that further investment in the company was
unwise; While they con,tinued to seekl~alian Government support for the plant in Sicily, they
also begari to ptatf foi tlie. possibl~ v()Iuntary 'liquidation of · ELSI.
(4) « Commerciai Treaty .Program ofthe United States •, Department of State Publication 6565, Commerciai
Pblicy Series 163, p. lt (Jan. 1958) (Annex 87; p. s).
(6).As stated by Hawkinsj
« From the standpoint of · economie relations, ... the signifìcance of establishment provisions arises largely
from their i:elationship to the. ftow of investment capitai. Foreign capitai will not enter a country unless it
has• some· assurance that it will receive. fair treatment ..• o,
H. HAWKINS, Commerèi~l 'Treaties and Agreements, pp. 15-16 (1951).
( 6) · Annex 85, p. 6.
(7) Article Il(2) specifies that:
« Corporations and associations · created or organized under the applicable laws and regulations within the
territories of either High Contracting Party shall be deemed to be corporations and associations of such High
Contracting Party ... •·
(8) As discussed at p. 31, infra, the Mayor's action was attributable .to the Goverrunent of Italy.
MEMORIA DEL· GOVERNO U.S.A, 31
.· .... ·• :P~spì,~ ~1!$Ul:'!mce$. given by the Presid.ent ofth~ Sicilian Region ~s late as February 1968
that ESPl; a SiCiilian Govetnment entity, would. provide funds to enable. ELSI to stay in business
i~necessary; qo support.was fotl:hcoming from Italy to justify a reversalof the impending decision
W.Jiq:uidàte. Accord.ingly; Raythe~ and.. Machlett decid.ed. to cea11e. full-:Scale production and
liquidate the <lomp~my and to d.ismillll as of 29 Maroh all employees but those personnel.necessary
1:Q/ç~,;ryout the Uquida#on(~l········· .. ·· · . • · .
.. Qn 3t.1Vlai4h howevet, theJhe!!ide!ltofthe.Sicilian Region informed ELSl's.Managing
l:>:it~lrtgr of oo:J;tàUan GoverntP~t plan.whereby ELSI's plant would be requisitioned to prevent
lii;p;iìdatiòn and to give the state c:;onglomerate IRI the opportunìty to açqui,;.e ELSI's assets.
TheJ()llowing dayi th!,! Ma"YQ~rof Pal~rm.o issued. the requisition .ord.er .(J.0).
In so çloing; the M!lyox: .of' Palermo . was. acting in his capacity as an agent of the national
g(lvetn;ment, and. thw~ his actions were atttibut!!.ble to the Government of Italy. As the Court
of Palermo ruled ~ ·· ·
« the Mayor in issuing the orders mentioned in Article 69 of Decree Law Pres. Reg. N. 6
of October 21, 1955, acts as a functionary of the dvii administration of the [Ministry of
the] lnterior, of whose heirarchy he is a part, so that, as has been established for the
....... ~esPc:>nsibility.oftbe ()tgans.which .. are. Part of.the.direct ad.tnJnistrationof the State, the
·•·•·••••·•••••ì~f~!~~~ ~ri~Je~Et~~~~=~~&r~r.:J::•=~~~~ctn~()~li~ci!io~~~~s~a~~~:~~~:
• · .·· .J?hi~ ;~~clu~i~n ~s ·~ot ;ffeé~ed by ,th~ • determination that the · requisition was unlawful.
It has long been established;>as stated iri the Estate òf ]ean--Baptiste Cat're (France v. United
Met.l.licanStates); that « it does not matter whether the official or agertcy in question acted within
the limits of its competence or exceeded them (111} ». Moreover, even if the Mayor had not been
foHndJQ llt: acting li~é anpffi~i::l.l. of th.e. nationalgovernment, the requi~ition would be attributable
on otbet grQU11d,liltO the Go:Vemtn<'l1lt of Italy since the action clearlywas taken by the Mayor
in hls offidiil capacity as a government officer- aposition he maintained consistently before
the courts of Italy (13),
(9)Suprii; pp. u-'xz; Annei xs, pata. f.7·
(10) Supra, pp. 12-13 r Annex I6, para&.· 6x.:..6a and Annex 33·
• (11) Am:).ex 8Q, ;~t 6, Thus, the r.equisitiQn is an actJ,on of the national government per se. See, e. g., R. Ago,
ii Le Délit Intèrn;~donal>; 68Rectie# des·ciiurs de l'A~adlmie de d;oii international de !.a Haye (« Recueil des cours »),
p;419 atpp/462-'469 (1939); D. ANzrtoT'ri> i Coiirs dé droitintiirnatiilnal; p. 470 (Ig~g); E. JrMENEZ DE AmlcHAGA,
«ln~emationalResp()nsibilìty », Manflalof Pultlic Intllmatìlmal La'll.l; p. S# (M. Sorensen, ed. Ig68); I. BROWNLIE,
Syst~tft Pl~aw oj lfati(l1)s,. Stat~ ResP;omibilitl!. (Part x), Pp· I3~'C.14l (19.83); G. A. CHRISTENSON, « The Doctrine
of Attrìbtitioit m State R~sponsibllity »; It~teth.iiti<intil La'll.l oj State Resprmsibility far Injuries tò Aliens, pp. 33o-33~
(R/ B/Lillìch; e(J. and eontflb; 1983); C. l:l!! Vxsscas:R; Th~ory and Rl!alitjlìn Public lnternatioftal La'll.l; p. ~89 ( 1968);
C;•EAGL!ttON, •TiteResponsibility of State$ in lnternational Law,.p .• 44 (19~8); Articles s, 6 and 7 of Part One of the
International Law Commission's draft articles on State responsibility (« International l;.aw Commission's draft
articles an State responsibility »), II Yearbook of the International La'll.l Commission, 1980 (Part Two), p. 31; F. V.
GA:R.CtA,.,AMAJ;IOR,. « Dr~ Articles on the Re.~polll!ibility of the State for. In.illries . Call$e.d in its Territory to the
Person or Prope~:tx .o{ Aliena~(« Garcfa~Amador's draft articles an State responsibUity' •), reprl.nted in F.y. GARCIAAMA:
ooit{L. SoliN; i11id R. BA:xtl!R, ReàntCodi:ficatiòn oj the Lriw o/State Rriipomibìliiy jor 1njuries to Aliens, pp.
~1-23 (1974), ' .• .
(12) Translation. s Reports of International Arbitrai A'll.lards, p. 516 at pp. 529-530. As more recently stated
in Comment I to Aiiticle x o of Part One of thlilntemational Law Commission's draft articles on State reilponsibility,
the. aetion is atti:ibutable
uven in. the case of manifest incompetel).ce of the organ perpet+;~ting the. conduct complained of, and even
if other organs of the . $tate bave disowned the conduct of the offendin3 organ &. . .
Il Yearbook of the International Law Commission, I9'J5, p. 61. See also, e.g., T. Meron; « Ihternational
Responsibility of States for Unauthorized Acts of their Officials », 1957 British Yearbook of International La'll.l,
pp. 88, 93, and II3-II4 (1958); P. Reuter, «La responsabilité internationale », Droit international public, pp. 149-
ISO (1958); BROWNLIB, op.cit., at pp. 135-137; }IMBNBZ DE AmlcHAGA, op.cit., at p. 548; Eagleton, op. cit., at pp.
s7-s8; ANziLotTI, op.cit., at pp. 470-47I; AGo, op.cit., at p. 469.
(13) Annex So, p. 3; Annex 81, p. s. See, e.g., Pieri Dominique & Company (France v. Venezuela), IO Reports
of International Arbitrai A'll.lards, p. I39 at p. xs6; BROWNLIB, op. cit., at pp. 141-14~; CHRIBTBNSON, op. cit., at
p. 333i RllUTI!R, op, cit., at pp. IS~-I53i ANZILOTTI, op.cit.; at pp. 475-478; JrMI!NBZ DE ARECHAGA, op;.cit., at pp.
557-558; EAGLETON, op. cit;, at p; 3~; Artide 7 of the ·tntemationar Law· Commission's draft articles on State
responsibility, II Yearbook of the International Law Commission, I98o, at p. 31.
32 RASSEGNA DELL'AVVOCATURA DELLO STATO
The requisition was aimed specifically at preventing Raytheon and Machlett from taking
steps to protect their interests as investors, namely, to liquidate ELSI and minimize their losses.
It necessarily and intentionally blocked ELSI's plans to sell its assets. Having relinquished
contro} of the plant on 2 Aprii, ELSI management no longer had physical access to the assets.
Nor could it bave attempted to sell them with the legai cloud of the requisition over the plant.
ELSI was prevented from carrying out a management decision reached by its controlling
shareholders "'- to dose an unprofitable plant ànd to liquidate its assets to satisfy outstanding
debts. Moreover, this order was not in accordance with ltalian Iaw, as subsequently confirmed
by the Prefect of Palermo (14).
The Government of ltaiy thus did not permit Raytheon and Machiett to organize, manage
and contro} their investment, for their own protection as investors, but rather intervened with
an illegal action to prevent such management and control. The United States accordingly
submits that the Government of ltaly violated Article III(2) of the Treaty.
SECTION 2. - Article I of the Supplement.
Less than two yeai:s after the Treaty entereq into force, Italy and the United States signed
the Supplement to the Treaty. The · Supplement was seen by the parties as an important step
in further encouraging investment by providing stronger guarantees to investors of freedom
from harmful treatment. As stated in the Preamble, the purpose of the Supplement was to
« giv[e] added encouragement to investments of one country in useful undertakings in the other
country •.. by amplification of the principles of equitable treatment >>. The United States Secretary
of . State, in recommending that the Senate give its advice and consent to ratification,
similarly stated that:
« by rounding out the comprehensive rules governing generai economie relations established
by [the] Treaty, [the Supplement would] further encourage private capitai investments
(ID)».
The Italian Minister of Foreign Affairs, speaking before the ltalian Senate, emphasized
Italy's strong economie interest in ratification of the Supplement (1 6). As Senator Jannuzzi,
who wrote the majority report approving Senate ratification, observed:
« The ruling out of any discriminatory treatment or arbitrary measures to the prejudice
of citizens, juridical persons or associations of Italy or of the United States that respectively
work ·in the territory of the other State, the possibility of unobstructed contro l of enterprises,
the most liberai possibie treatment assured for the transferability of capitai, [and] the fiscal
concessions are ali principles which, suitably supplementing those contained in [the Treaty],
aid the Italian economy [in particular], insofar as they are aimed at favoring the investment
of U.S. capitai in Italy (17) ».
The « exclusion of any discriminatory treatment or arbitrary measures to the damage of •..
juristic pei:sons » to which Senator J annuzzi refers is contained in Article I of the Supplement,
which carne into force on 2 March 1961. It provides that:
« The nationals, corporations and associations of either High Contracting Party shall not
be subjected to arbitrary or discriminatory measures within the territories of the other High
Contracting Party resulting particuiarly in: (a) preventing their effective contro[ and management
of enterprises which they have been permitted to establish or acquire therein;
(14) Annex 76, pp. 1o-13.
(16) Letter of the Secretary of State dated 25 Jan. 1952, contained in the Message from the President of the
United States transmitting the Supplementary Agreement, Senate Print Exec. H, 82nd Cong., 2nd Sess., p. 2
(Annex 88). See N. 3, Chapter I, supra.
(16) Senate of the Republic, Parliamentary Proceedings, Legislature III, Bills and Reports - Documenta,
1958-1960, N. 931-A, p. 4, Sent to the.Office of the President on 18 July 1960 (Annex 89).
(11) Annex 89, pp. 2-3.
MEMORIA DBL. GOVERNO U.S.A. 33 ----------------------------
or. (b) impairing their other legally acquired rights. and interests .in such enterprises. or in
the investments which they bave made, whether in the forrn of funds (loans, shares or
otherwise), materials, equipment, services, processes, patents, techniques .or otherwise ... »
(Emphasis addeçl) •
. This provision .• complements an d strengthens the guarantees of non-dis.criminatory
treatment and freedom from interference with mai1agement and control which are contained
in Article III of the Treaty (18), The terms of Article l, « shall not be subjected .», are imperative
and unqualified. Unlike Article III ofthe Treaty, Article I is not limited hy any reference to
national treatment or to domestic law. It thus establishes a standard ofprotection for United
States nationals independent of. the standards of treatment accorded to I talian or third country
nationals or corpor11tions. Article I prohibits, in absolute terms, governmental measures which
are e~ther « arbitrary or discriminatory », and,. which prevent United States i:ra:vestors from effectively.
controlling and managing .. companies which they have established or acquired in ltaly.
As set.forth above, the requ.isition clearly prevented Raytheon and Machlett from exercising
tbeir management and contro} of F;LSI. In order to establish a violation of Article I, therefore,
it.remains to pe shown that the requisition was an « arbitrary or discriminatory measure ».
11'1 accw:dance with Article 3 I of the Vienna Convention on the Law of Treaties, which
in this respect co.difies established customary internationallaw, a Treaty should be interpreted
in accordance with << the ordinary meaning to be given to the terms of the treaty in their context
and in the light of its object and purpose (19) ». The object and purpose of this Treaty in generai,
and of this Article and formula in particular, indicate that the prohibition of « arbitrary or
discriminatory measures » should be:: construed broadly, to protect investors against governmental
actic;nf which • violated · thè hasic principles of non-discrimination and « fair play '' which
tinderlie the. 'l):eaty. In hearings before the United States Senate, the Department of State
witness stated that:
« The basic aim of the [investment] provisions [is] to safeguard the investor against the
nonbusiness hazards of foreign operations, ... [such as] [i]nequitable tax statutes, confiscatory
expropriation laws, rigid employment controls, special favors to State-owned businesses,
drastic exchange restrictions, and other discriminations against foreign capitai (-!0) »,
As explained in the Report of the President to the ltalian Chamber of Deputies:
« The [Supplementary] Agreement proposes, above all, to eliminate any discriminatory
measure. that one of the two countries might adopt to the prejudice of citizens or juridical
persons of the other contractmg party, any measure aimed at impeding management or
effective contro! of enterprises for Which they have received the required license to purchase
or establish, or any · measure aimed a t obstructing the exercise of their rights relative
to such enterprises or to investments of any type (-!1
) "·
As is indicated by the above statement, and by the use of the disjunctive « or » in the phrase
« arbitrary or discriminatory », Article I prohibits « arbitrary '' measures as distinct from, and
in addition to, « discriminatory measures », The prohibition of « arbitrary » n:ieasures conveys
above ali the commitment of the respective governments not to injure the investl'nents and related
interests of foreign investors by the unreasonable or unfair exercise of governmentàl authority.
Following standard dictionary definitions, an « arbitrary » act may be one which is characterized
by absolute power or an abuse of discretion. « Arbitrary actions » include those which are not
based on fair and adequate reasons (including sufficient legai justification), but rather arise from
(18) The rights referred to in Article I(b) are addressed in Chapter Ili, infra.
(19) Vienna Convention on the Law of Treaties, A1.1:. 31(1), U.N. Doc. A/CONF. 39/7.71 p. 7.93 (1969).
(20) Remarks of Harold F. Linder, Deputy Assistant Secretary of State for Economie Affairs (Annex 86, p. 4).
( 21 ) Chamber of Deputies, Parliamentary Proceedings, Legislature III, Documenta - :Bills and Reports,
N. 537, pp. 1--:t., presented to the Office of the President 8 Nov. 1958 (Annex 90).
34 RASSEGNA DELL'AVVOCATURA DELLO STATO
the unreasonable or capricious exercise of authority (22). The terms « oppressive » and << unreasonable
» are thus synonyms of « arbitrary (28) ».
As used in Italian and United States legai practice with reference to governmental action,
« arbitrary » actions include those which are unreasonable, in the sense that they are not based
on sufficient or legitimate reasons, or are unduly unjust or oppressive. The Italian Constitutional
Court has interpreted the I talian constitutional guarantee of impartial public administration
as prohibiting the promulgation of arbitrary or unreasonable regulations (24). Similarly, under
Law N. 1034 of 6 December 1971 which governs regional administrative tribunals, one of the
bases for review of Italian administrative acts is excess of authority (eccesso di potere). This
concept includes both misuse of power (sviamento di potere) and inequality of treatment (disparità
di trattamento), which in turn require that ali administrative actions be free of arbitrariness and
discrimination (25).
Similar standards in United States jurisprudence derive from the constitutional guarantee&
of equa! protection of thè law and due process and are found in the federai Administrative
Procedure Act, among other statutes. The Act provides, in pertinent part, that « a reviewing
court shall ... hold unlawful and set aside agency action ... found to be (A) arbitrary, capricious,
an abuse of discretion, or otherwise not in accordance with law (2 6) ». The provision has been
interpreted as requiring the court to « consider whether the [agency] decision was based on a
èonsideration of the relevant factors and whether there has been a clear error of judgment (27) ».
(22) See, e.g., Ballentit~e's Law Dictionary, p. 88 (3d ed. I969); Black's Law Dictionary, p. 96 (5th ed. I979);
Shorter Oxford English Dictionary, p. 9I (I944); Webster's New International Dictionary of the English Language
p. I IO (3d ed. 196I). See also, G. DEVOTO and G. C. OLI, Vocabolario Illustrato della Lingua Italiana, p. 25 (I983)
(« arbitrario ~ defined as « irregolare, abusivo, ingiustificato, fatto o ditta ad arbitrio ~ [irregular, illicit, unlawful
unjustifìed, done or said in violation]).
(28) Roget's International Thesaurus, Secs. 627.5 and 737.I5 (3d ed. I962). A number of United States investment
protection treaties prohibit, variously, « arbitrary and discriminatory >> or « unreasonable and discriminatory ,,
measures. See, e.g., Panama, Art. Il(2), 2I International Legal Materials, p. I227, at p. I230 (I982) (ratifìcation
pending); Belgium, Art. 4(2), I4 United States Treaties 1284, at p. 129I. The United States regarded these terms
(« arbitrary » and « unreasonable ») as equivalent. See, e.g., the United States interpretation of Art. IV(I) of the
Treaty of Amity, Economie Relations and Consular Rights between the United States and Iran, signed IS Aug.
I955, entered into force, I6 }une I957, 284 UNTS 93, 8 UST 899, forbidding application of « unreasonabie or discri- ·
minatory measures ~:
« Government conduct which does not intrinsically violate international law is nevertheless unlawful if it
is arbitrary or it discriminates against aliens. Thus, actions by the Government of Iran which otherwise
might have been lawful were unlawfui if the government engaged in these actions arbitrarily or directed
them against U.S. nationals ».
• Memorandum of the Department of State Legai Adviser on the Application of the Treaty of Amity to Expropriations
in Iran», 22 International Legal Materials, p. I4o8 at p. I4II (I983).
Similar clauses, prohibiting not only discriminatory but also unreasonable, unfair, or arbitrary treatment,
are also found in investment protection treaties between other nations. For example, the agreement concerning
the promotion and reciproca! protection of investments between the Republic of Cameroon and the United Kingdom
stipulates in Artide 2(2) that:
« Neither party shall in any way impair by unreasonable or discriminatory measures the management,
maintenance, use, enjoyment or disposal of investments in its territory of nationals or companies of the other
Contracting Party ».
The corresponding French text prohibits « mesures arbitraires ou discriminatoires ~. ICS ID, lnvestment Promotion
and Protection Treaties, I982 Booklet, p. 4I at pp. 42 and 49· See also, e.g., investment protection
treaties between Panama and Switzerland (Art. 2(a): « mesures indues ou discriminatoires ~), ibid., I983 Booklet,
p. 63 at p. 64; the Belgium-Luxembourg Economie Union and Rwanda (Art. 3(2): « toute mesure injustifìée
ou discriminatoire »), ibid., p. 8I· at p. 83. Stili other treaties, rather than prohibiting unfair or unequal treatment
affirmativeiy guarantee fair and equitable treatment. See, e.g., the Federai Republic of Germany and the People's
Republic of China (Art. 2: assurance of « fair and equitable treatment ~ ), ibid., p. 43 at p. 44; Kuwait and Pakistan
(Art. 2(2): assurance of • fair and equitable treatment >>), ibid., p. I7 at p. I8.
(24) Corte Costituzionale 30 Jan. I98o, N. Io, I Giurisprudenza Costituzionale, I98o, p. 67 at p. 9I; Corte
Costituzionale IS Feb. I98o, N. I6, I Giurisprudenza Costituzionale I98o, p. I37 at p. I43·
(26} RossANo, L'Eguaglianza giuridica nell'ordinamento costituzionale, p. 450 (I966); SANDULLI, I Manuale
di Diritto Amministrativo, pp. 620-624, Sec. I4I(e) (I982).
(26) United States Code, Title s, Sec. 706(2) (A) (I982) (Annex 9I).
(27) Citizens to Preserve Overton Park v. Volpe, 40I U.S. 402, 4I6 (I970). See also, Motor Vehicles Manufacturers
Assoc. v. State Farm Insurance Co., 463 U.S. 29 (I983).
MEMORIA DEL GOVERNO U.S.A. 35
Other municipal legai systems as well prohibit arbitrary governmental action of this character.
In France, for example, in accordance with decisions of the highest French administrative
court, the Conseil d'Etat, administrative action will be considered « arbitrary )) if taken without
due regard fòr the factors and legai principles governing the legitimate exercise of discretion in
a particular case (28). As stated by de Laubadère, a typical example of such improper use of
authority is the use of police power for a goal other than public security, peace or well-being,
« for example, a financial goal (29) ». The << classic mode! )) which he cites is police orders limiting
the use of a public pier in order to reduce the maintenance expense to the commune (30). Similar
standards are in force in the Federai Republic of Germany under Section 40 of the Federai
Law on .Administrative Procedure of 1976 Verwaltungsverfahrensgesetz of 25 May 1976,
BGB1. I 1749 (1976)), which provides:
<< If an administrative authority is authorized to act according to its discretion, it must
exercise its discretion according. to the purpose of the authorization and observe the legai
limits of the discretion (31) ».
In international law as well, the term « arbitrary )) is used to describe prohibited actions
which constitute an unreasonable, improperly motivated, or unduly unjust or oppressive use
of otherwise legitimate governmental authority. Thus, for example, a variety of otherwise lawful
actions, such as expulsion of aliens, arrest, detention, deprivation · of nationality, cancellation of
contracts, and deprivation of property may be prohibited when << arbitrary (32) », In this context,
an << arbitrary )) action is one which is unjust or unreasonable in light of the relevant international
standards (33). More generally, the concept of << abuse of rights » illustrates the generai usage
(28) Société Glace Service, 26 July 1985, N. 51.083, Recueil des décisions du Conseil d'Etat, (« Recueil Sirey t)
1985, p. 236; Caminade, 13 Jan. 1983, N. 27.966. Under French administrative law, arbitrary administrative
acts rnay be annulled through the procedure of the recours pour excès de pouvoir. See, e.g., Vedel and Delvolvé,
Droit administratif, pp. 8o7-8u (9th ed. 1984).
(29) « The typical example [ of détournement de pouvoir] is that of police power's, which, by their nature, can
only be exercised for a goal of security, peace, or well-being, and not .for some other objective of general
interest, for example, a financial objective (the classic model of annulling police orders limiting the usage
of a public pier in order to reduce the expense of upkeep to the commune: Decision of the Conseil d'Etat,
u Nov. 1927, Bellescrize, p. 1048 ~.
Translation. ANDRE DE LAUBADERE, x Traité de droit administratif, p. 599 (9th ed. by J, C. Venezia and Y.
Gaudemet 1984).
( 30) Ibid. See also, e.g., Sieur Beaugé, Conseil d'Etat, 4 July 1924, Recueil Sirey, p. 641 (mayor's order requiring
ocean bathers to change clothes in local bath-houses motivated by financial interest of the village, annulled as
détournement de pouvoir); Caisse de Compensation pour la Décentralisation de l'Industrie Aéronautique, Conseil
d'Etat, 8 July, 1955, Recueil Sirey, p. 398 (refusal to approve the budget of establishment in order to provoke its
liquidation annulled as détournement de pouvoir).
( 31) Translation. This provision represents the concretization of the generai prohibition against arbitrary
action (allgemeines Willkilrverbot) deduced from articles 3 and 20 of the Basic Law (Grundgesetz) of the Federai
Republic of Germany. The German Federai Constitutional Court has reaffirmed this generai prohibition on
numerous occasions. See generally, G. LEIBHOLZ and H. J, RINCK, Kommentar zum Grundgesetz (6th ed. 1985),
Art. 3, annotations 2-5; Art. 20, annotation 20; K. 0BERMAYER, Kommentar zum Verwaltungsverfahrensgesetz
(1983), para. 40, annotation 76(b) (x).
(3J) See, e.g., C. F. Murphy, « Limitations upon the Power ofa State to Determine theAmount of Compensation
Payable to an Alien upon Nationalization ~. in 3 The Valuation of Nationalized Property in International
Law, pp. 56-62 (R. Lillich, ed. 1975) (arbitrary expropriation); American Law Institute, The Foreign Relati ns
Law of the United States. (Second Restatement) (1965) (• American Law Institute, Second Restatement ~), sec. 193
(arbitrary breach of contract) (see also, Tent. Draft N. 7, 1986, sec. 712: arbitrary impairment of property or
other economie interests); International Covenant on Civil and Politica[ Rights, U.N. Doc. A/Res/220o A (1960)
Articles 6 (deprivation of life), 9 (arrest or detention), 12 (right to enter one's own country), 17 (interference with
privacy, family, home or correspondence); Universal Declaration of Human Rights, U.N. Doc. A/Res/2I7(III)
(1948), Articles 9 (arrest, detention or exile), 12 (interference with privacy, family, home or correspondence), 15
(deprivation of nationality), 17 (deprivation of property).
( 33) As one commentator has stated with respect to the use of the term « arbitrary • in the Universal Dcc· a.
ration of Human Rights, « the reason for the use of the words ' arbitrary' or ' arbitrarily ' was to protect individuals
from both 'illegal' and 'unjust' acts ~. P. Hassan, « The Word 'Arbitrary' As Used ·in the Universal Declaration
of Human Rights: 'Illegal' or' Unjust'? >l, xo Harvard International Lawjournal, p. 225 at p. 254 (1969).
See also, P. Hassan, << The International Covenant on Civil and Politica! Rights: Backgrouhd and Perspective on
Artide 9(1) •, 3 Denver journal of International Law and Policy, p. 153 (1973); JIM!WE:I; D1l AR1lCftAGA1 • Thç
36 RASSEGNA DELL'AVVOCATURA DELLO STATO
of the term « arbitrary » to refer to govemmental actions which are unreasonable, improperly
motivated, or unduly unjust or oppressive (114).
The requisition of ELSI's plant was precisely the sort of arbitrary action which was prohibited
by Artide l(a). Under both the Treaty and ltalian law, the requisition was unreasonable
and improperly motivated. The requisition was found to be illegal under Italian domestic law
for precisely this reason: it was « destitute of any juridical cause which may justify it or make
it enforceable (35) ll,
Apart from considerations of Italian law, moreover, the requisition was « arbitrary ll for
purposes of the Supplement. Its object and effect were to prevent Raytheon and Machlett
from proi:ectìng their investment, without any justification which can be viewed as legitimate
in terms of the governing principles of the Treaty.
The declaration of a public emergency in this case was a mere device; if the closing of the
plant was an « einergency », it was an emergency of ltaly's own creation. Raytheon and Machlett
had given the Italian authorities every opportunity to take legitimate steps to prevent ELSI
from closing, but the Italian authorities declined to do so. Instead, they sought to force Raytheon
and Machlett to keep ELSI open by the sheer exercise of power. The requisition was not used
to prevent ELSI from closing; as the Prefect noted, Italy took no steps to keep the plant in
operation, but merely seized it. In short, the planned closing was not a bona fide public emergency,
nor was the requisition a bona fide response.
The purpose of the requisition appears to have been to create the appearance of action,
while allowing time for IRI to step in to take over the plant. The Prefect noted the apparent
intent to show the local press that governmental authorities were « fac[ing] the problem », notwithstanding
that they did nothing concrete to resolve the problem (36). At the same time, IRI
was developing plans to expand into this area, but was not yet ready to do so.
This motive is discriminatory. As noted above, Artide l(a) prohibits « arbitrary or discriminatory
ll measures without qualification. To << discriminate ll is « to make distinctions in treatment,
show partiality (in favor of) or prejudice (against) (37) ll, The term « discriminatory ll thus
embraces discrimination in favor of government-controlled enterprises. The Treaty explicitly
recognizes the need to protect against discriminatory action in favor of publicly owned or controlled
enterprises (38). The purpose of the Supplement was to strengthen these protections,
and in particular to protect against « special favors to State-owned businesses (39) li, Here
IRI's interests were directly contrary to Raytheon's and Machlett's, and the Govemment intervened
to advance its own commerciai interests at the latter's expense. This is a particularly
Background to Artide 17 of the Universal Declaration >l, 8 J ournal of the International Commissions of Jurists
N; 2, p; 34 (1968); F. V. GARCIA-AMADOR, Fourth Report on State Responsibility, Yearbook of the International
Law Commission I959, Part II, para. 24, p. 7 (UN Doc. ACN. 4II9, para. 24).
(34) In Case Concerning the Barcelona Traction, Light, and Power Company, Limited, for example, the Govemment
of Belgium equated the concepts of << arbitrary » administrative action, détournement de pouvoir, and « abuse
of rights ». See, e.g., oral argument (second phase) in 8 Memorials, Pleadings and Documents, pp. 35-43; submissions,
reproduced in the Judgment (Second Phase), IC] Reports 1970, pp. 12, 17. See also, e.g., 1 Oppenheim's
International Law, p. 345, (8th ed. by H. Lauterpacht 1955):
« [Abuse of right] occurs when a State avails itself of its right in an arbitrary manner in such a way as to
inflict upon another State an injury which cannot be justifìed by a legitimate consideration of its own advantage
»;
and G. ScHWARZBNBBRGBR, International Law and Order, p. 1oo:
« The hard core of situations, in relation to which the hypothesis of the abuse of rights remains potentially
relevant, is the arbitrary or unreasonable exercise of absolute rights .... Thus, ultimately, the issue reduces
itself to that of the arbitrary or unreasonable exercise of rights or powers within the exclusive jurisdiction
of States ».
See also, MuRPHY, op. cit., at pp. 59-62; GARCIA-AMADOR, op. cit., at paras. 22-29.
(35) Annex 76, p. 11.
(36) Annex 76, p. 12.
· (37) Webster's New World Dictionary of the American Language, p. 403 (1982) (emphasis in originai). The
Italian word « discriminazione » is defìned « distinzione operata nel corso di un giudizio o di una classificazione t
(«a distinction made in the course of a judgment or classifìcation »), G. DEVOTO and G. C. OLI, Vocabolario illustrato
della lingua italiana, p. 8n (1983).
(38) See, e.g., Artide XVIII of the Treaty and Paragraph 2 of the Protocol.
(39) Annex 86, p. 4·
.· MBMORlA DEL GOVERNO U.S.A. 37
dear-cut departure from the Treaty principle of « fair play » and the specific guarantee of Artide
I(a) of th~ Supplement ..
. . · •. · .• 'fhtll'~(;plisitìon Jhus .was an « arbitrary or discrimi:natory rn.easur~ » for . purposes of the
Treaty •.. rt was an unreasonable actì9n wpjcb. di d .not r.e!ìt on .tegitiJ:nat~ grou:n,cis, .neither under
Italian law nor under the goveming priilciples of the Treaty. It was precisely the sort of
«r~:çtecl t(;lç}l:çtiqM(;l •• »~ C@trary t;o ~be fJJ:ndam(;lQtal prinçipJtls pf .. ~(;lquitabl~ trtlatment», and « ~~~r pJa~r »J 'Whi<J.bArdcleJ(alwlils mte:nded to ptohibit.. Accor<;lingly, the :tJ :n,ited · States sub:rnits
tbat tbe requisidon was. lil,n llibitr~rY • and d~!lcriminatory. measur.e -which efl:ectively preyented
R,aYth~on!lli~.· •.• Mac:;hJ~tt··:rroW..~~ercising W.allagernent.and control of ELSI, in violation of
A,rdcfe l(a) 9( the $UI?I?lern.ep,t •. · · · · ·
S:EcTION 3; · ""' • A:Yticle ·. VII·. oj the Tteaty. ·
The • guat~tl?:tees o:f management ~tn<i 9ontrol established by ArJicle Il I of the Treaty an d
Artide I 0fth.è Sqpplement are futther buttressed by Articl.e VII ofthe Treaty, which provides
1n pa~:f: · · ··· · · · · ·
.··.··.<·.:· .· -: '
« The nationals, ·• corporations and associations of · either High Contracting Party shall be
permitted to .. ; dispose of immovable.property .or interests therein within the territories
of theother High .Contracting Party• upon,. the following terms :.
• t t o o o o o o o o o o o o o o o o o o o o o o o o o o o •• o o o o o o o o o o o o o o o o o o o o······; o o • • o o o o • o o o o o o 'o o o • o • o•
(b) in the case of nationals, corporations; and associations of the United States of
America> the right to acquire; own • and ·dispose of such ptoper.ty upon terms no less favorable
than those which are or may hereafter be accotded by the state, territory or possession
ofthe United States ofAmerica ,;; un:der the laws ofwhich such corporation or association
is created or organized, to ... corporations ... of the Italian Republic ''·
The Treaty thus guarantees that a United States corporation which has invested in Italy
is entitled to dispose of immovable property or interests therein upon the same terms as would
an Italian corpor~.ttion invest~g inthe. United States investor's state of incorporation.
Raytheor.i is incorporated in the State of Delaware (40) and Machlett is incorporated in the
State of Connecticut {41). Under Artide VII of the Treaty the Government of ltaly undertook
to allow these United States cotporations to dispose of immovable property and interests
therein upon terms no less favorable than would be ac.cotded by these states to Italian corporations.
Under the laws of both Delaware and Connecticut, corporations. may be dissolved and their
assets sold pursuant to determinations by their boards of directors and shareholders (42); For
example, Oelaware provides in Section Z7I of.Title 8 of its Code:
« Eyery corpotation may a t any meeting of its board of directors or governing body sell,
. Iease or .exhltnge alLor sub$tantially all of its ptoperty and lissets ... upon such terms and
conditions and for such cor.isidetation ·•. as its board of directors or governing body deems
expedient atid for the best ititetests of the cotporation; when and as authorized by a resolution
adopted by the holders of a majority of the outstandind stock of the corporation
entitled to vote thereon , •. (43) ».
(40) Annex 7·
(41) Annex 16.
(42) See Delaware Code Annotated, Title 8, Secs. 271, 275 (1983 and Supp. 1986) (Annex 92); Connectictut
General Statute, Annotated, Secs. 33-372, 33-375 (West 1958 and Supp. 1986) (Annex 93)• These constitutional
guarantees may be enforced through procedures made available to property owners under state law. See, e.g.,
Delaware Code Annotated, Title xo, Secs. 61ox-6us (1975) (Annex 94}.
(48) See Annex 92.
38 RASSEGNA DELL'AVVOCATURA DELLO STATO
The courts of Delaware have emphasized that:
« there is no statutory limitation on the right of a Delaware corporation to sell its assets
on such terms and conditions and for such consideration as its board of directors deems
expedient and in the best interests of the corporation (44) ''·
Thus, under the reciproca! guarantees of the Treaty, Raytheon and Machlett were entitled
to liquidate ELSI's assets pursuant to the decision of its shareholders and board of directors.
The requisition which foreclosed this planned action violated Artide VII of the Treaty.
Carrying the reciprocity point further, if Delaware or Connecticut were to take the immovable
property of a corporation for a lawful public use, they would be obligated to make compensation
for that property under fundamental provisions of the United States Constitution (45)
and the respective state constitutions (46). Constitutional rights affecting property interests
are guaranteed to both natural persons and corporations (47). The right to compensation fora
taking of interests in property is guaranteed to foreign as well as United States investors (48).
Under United States law, this duty to compensate owners of property for interference with
their property rights arises not only from a formai expropriation decree but also from government
actions, including interference with the use of the property, that amount to a taking of property(49).
Thus, in Benenson v. United States (60
), the United States Court of Claims ruled that where the
United States Government effectively barred property owners from exercising their right to
demolish improvements to their real property or otherwise use the property as they wished, the
United States violated the constitutional rights of the property owners and was required to
make appropriate compensation.
Most of the assets seized by the Mayor of Palermo and subsequently acquired by the Government
of Italy consisted of ELSI's manufacturing plant and other immovable property (51). As
discussed above, ELSI's owners had the right under the Treaty to dispose of this property
as they saw fit. The United States submits that by denying the owners that right, the Government
of Italy violated Artide VII of the Treaty.
(44) Alcott v. Hyman, I84 A. 2d 90, 94 (Delaware Court of Chancery 1962), affirmed 208 A.2d 50 I (Delaware
Supreme Court I965).
(45) The Fifth Amendment of the United States Constitution provides:
« N o person shall be ... deprived of life, liberty or property without due process of la w, nor shall private
property be taken for public use, without just compensation ».
(46) Section 8 of the Delaware Constitution provi d es:
« [N]or shall any man's property be taken or applied to public use without the consent of his representatives,
and without compensation being made ».
Section II of the Connecticut Constitution provides:
« The property of no person shall be taken for public use, without just compensation therefor ».
(47) The generai principle of equal treatment under the United States Constitution for corporations and
natura! persons was set forth by the Supreme Court of the United States in Grosjean v. American Press Co., 297
U.S. 233 (I936) (corporations are entitled to equa! protection of the laws of the United States). See, e.g., Fulton
Market Cold Storage Co. v. Cullerton, 582 F.2d I07I (7th Cir. I978), cert. denied 439 U.S. II2I (I979) (corporate
property owner can bring action against county and state taxing officials for wrongful assessments of property
value); Sterngrass v. Bowman, 563 F. Supp. 456 (S.D.N.Y. I983) (corporation may bring action against city for
wrongful decisions affecting corporation's use of rea! property).
( 48) Russian Volunteer Fleet v. United States, 282 U.S. 48I (I931) (when the United States expropriates the
property of an alien friend, the Fifth Amendment of the United States requires that it pay just compensation
equivalent to the full value of the property). Thus, non-resident aliens owning property within the United States
<< as well as citizens are entitled to the protection of the Fifth Amendment ''· United States v. Pink, 3I5 U.S. 203,
228 (I942). Cf., Sardino v. Federa[ Reserve Bank of New York, 36I F.2d Io6, III (2d Cir.), cert. denied 385 U.S.
898 (I966) (<< This country's present economie position is due in no small part to European investors who placed
their funds at risk in its development, rightly believing they were protected by constitutional guarantees »).
( 49) See, e.g., United States v. Clarke, 445 U.S. 253, 257 (I98o); Pennsylvania Goal Co. v. Mahon, 260 U.S.
393 (I922).
(50) 548 F.2d 939 (Court of Claims 1977). See also, Amen v. City of Dearborn, 718 F.2d 789 (6th Cir. I983),
cert. denied 465 U.S. IIOI (I984) (defendant city's course of conduct designed to force residents to sell property
to city violated United States Constitution).
(51) See, e.g., Annexes 20, SI, 57, 67 and 72.
CHAPTER III
IMPAIRMENT OF INVESTMENT RIGHTS AND INTERESTS
SECTION I. - The Requisition.
Artide I(b) of the Supplement provides, in pertinent part, that:
<< corporations ... of either High Contracting Party shall not be subjected to ... arbitrary
or discriminatory measures within the territories of the other High Contracting Party resulting
particularly in ... impairing ... legally acquired rights and interests in such enterprises [other
than management and control] or in the investments which they bave made, whether in
the form of funds (loans, shares or otherwise), materials, equipment, services, processes,
patents, techniques or otherwise » (Emphasis added).
As discussed in connection with Artide I(a) above, Artide I of the Supplement is intended
to extend the safeguards for foreign investment contained in the Treaty to reach « the more
refined techniques through which governments might effectively destroy investments made
by foreigners ... » (1). As explained in the contemporaneous Department of State report to the
United States Senate:
« [I]t is believed to serve a useful purpose in that it affords one more ground, in addition
to all the other grounds set forth in the treaty, for contesting foreign actions which appear
to be injurious to American interests. A given measure of a foreign government might,
for example, be fully consistent with the national treatment or most-favored-nation treatment
rules of the treaty, and also short of expropriation, but yet arbitrary and unreasonable
as it affected some vested American interest in the country concerned. In that event, the
only treaty ground for protest might be generai language such as is found in [Artide l(b)
of the Supplement] (2) "·
Artide l(b) thus extends the basic principles of fair play and non-discrimination to all
forms of governmental action which are injurious to investors, prohibiting any « arbitrary or
discriminatory measures » which impair not only the rights, but also the interests, of United
States investprs in Italian corporations.
As discussed above, the requisition of ELSI's assets was an arbitrary and discriminatory
measure. It not only effectively blocked Raytheon's and Machlett's exercise of management
and control over ELSI, but « result[ed] particularly in ... impairing [their] other legally acquired
rights and interests » in ELSI. The requisition thus violated Artide I(b), in addition to Artide
I(a) of the Supplement.
The impairment of Raytheon's and Machlett's rights and interests occurred because the
requisition, as intended, prevented the voluntary liquidation of ELSI and caused it to file for
(1) R. R. Wilson, describing the « new formulas on property protection » contained in United States investment-
protection treaties developed in the late 195o's. R. R. WILSON, United States Commerciai Treaties and
lnternational Law, p. 121 (xg6o).
(2) See State Department Comments in Annex 86, pp. 28-29.
40 RASSEGNA DELL'AVVOCATURA DELLO STATO
bankruptcy. As the court-appointed Trustee in bankruptcy stated m his complaint against
the Minister of the Interior and the Mayor of Palermo:
<< In consideration of the heavy legai and economical situation created by the appealed
order of requisition, Raytheon-Elsi S.p.A. was obliged to file for bankruptcy, which was
declared by decision of this Tribunal on May 7-16, 1968 (3) "·
Without control over ELSI's plant or assets, an orderly, voluntary liquidation was simply
impossible. Moreover, since ELSI's assets could not be liquidated, the point would soon be
reached where its debts could not be paid as they became due. Hence, there was therefore no
alternative but for ELSI to file a petition in bankruptcy (4).
By frustrating the voluntary liquidation, the requisition made the closing of ELSI much
more costly to Raytheon and Machlett than it would have been had this governmental intervention
not occurred. Raytheon was required to pay some 5.8 billion lire (US$9,Joo,òoo) to those
bank creditors of ELSI to whom Raytheon had made guarantees. As discussed in Part VI
below, these payments were substantially more than Raytheon would have paid had it been
allowed to proceed with the planned liquidation. In addition, Raytheon recovered nothing
on its open accounts with ELSI, totalling over 1.3 billion lire (US$t,8Jo,ooo). Finally, both
Raytheon and Machlett lost the small return on their investment which the liquidation could
have provided (6).
Further, the liquidation pian would have permitted payment of ELSI's unsecured loans.
Under the bankruptcy, however, unsecured creditors received less than I % of the amounts
claimed. As predicted by the President of the Sicilian Region (6), the government-controlled
banks which held these loans brought suit against Raytheon to recover the amounts due. While
the lawsuits ali resulted in judgments for Raytheon, they caused Raytheon substantial additional
and unnecessary expense n.
In addition to Raytheon's and Machlett's direct capitai contribution, Raytheon's guaranteed
of loans made to ELSI and its open accounts for goods and services provided to ELSI are
« investment rights and interests, which are protected by Article I(b). This Article expressly
protects not only contributions to capitai, but anything else provided by an investor to an Italian
corporation in which it invests « whether in the form of funds (loans, shares, or otherwise),
materials, equipment, services, processes, patents, techniques or otherwise ».
Both the open accounts and the guarantee payments are investments within this broad
definition: « whether in the form of funds ... or otherwise >>. The explicit inclusion of « loans »
in particular demonstrates that credit arrangements between a United States investor and an
Italian corporation are within the scope of protected investment rights and interests under
Article l(b). The open accounts are amounts owed to Raytheon and thus constitute a« loan ».
Raytheon's guarantees were originally in the nature of a contingent « loan » representing a
commitment to provide a specified amount of funds for ELSI's benefit on demand. When the
guarantees were paid, they become an actual loan of funds to ELSI. Thus, both the guarantees
and open accounts are protected investment rights and interests within the scope of Article
l(b).
Raytheon's financialloss in defending against the Italian bank lawsuits similarly constitutes
an impairment of protected rights and interests. The banks were suirlg Raytheon for payment
of ELSI's loans. If these suits had been successful, Raytheon would have been required to make
further contributions of funds on ELSI's behalf.
The United States accordingly submits that the requisition was an arbitrary and discriminatory
measure by the Government of Italy which impaired Raytheon's and Machlett's investment
rights and interests in ELSI, in violation of Article I(b) of the Supplement.
(3) Annex 79, p. 2.
(4) Supra, pp. 14-15, and Annex 26, para. 12.
(G) See discussion at pp. 6o-61, infra, and Table at p. 6o. See also, N. 13, Chapter VI, infra.
(6) Annex 38, p. I.
(7) See discussion at pp. 61-62, infra; Annex 40, para. 7 and Exhibit C.
MEMORIA DEL GOVERNO U.S.A, 41
S:ScTION z. - The Subrequent Courre of Conduct.
The harmful effects of the requisition were confirmed and compounded by the subsequent
conduct of ltalian officials, which was in further violation of Artide I(b) of the Supplement.
The requisition, indeed, was only the first step in a series ofconcerted actions taken by the I talian
government and IRI authorities to acquire ELSI's plan:t and related assets at less than fair
market value, while leaving Raytheon with responsibility for paying ELSI's outstanding debts (8).
Having requisitioned the plant and caused ELSI's bankruptcy, the Government of ltaly discou:
raged Private .. bidders, boycotted the auctions itself, and worked out special arrangements for
a piecemeaLtake-over directly with. the bankruptcy aut:horities.
The object of these actions was to secure ELSI's facilities for IRI, on the terms and at
the below-market price which IRI desired, while also responding to the politica! pressure brought
by ELSl's, former workers. These actions werè discriminatory measures prohibited by Artide
I of the Supplement, since they were taken with the clear object and effect of favoring a public
Italian entetprise at Raytheon's expense .. They resulted in the further impairment of Raytheon's
investment rights and interests. Thus, not only did the Government of ltaly wrongfully cause
the bankruptcy, it also proceeded wrongfully to exploit the bànkruptcy which it had caused (9).
Before the requisition was issued, the President ofthe· Sicilian Region had informed Raytheon
that lRl wanted to take over ELSI's facilities for its own use, but was not ready to do so immediately;
He attempted to convince Raytheon that it should keep ELSI open at its own expense
until . IRI . was ready. to. acquil,'e i t. He note d that, if Raytheon did no t do so, the requisition
would remain in effect and ELSI would have no alternative butto declare bankruptcy. Moreover,
he predicted, in such event the government would .make the result as costly as possible for
Raytheon (10). Raytheon, nevertheless:, declined to make any further investment in ELSI, seeing
no prospect of recovering such funds (11). When ELSI accordingly did declare bankruptcy,
the Govetnment of Italy turned its attention to the bankruptcy process.
The Government of Italy's objective was to acquire ELSI's. facilities for IRI at the lowest
possible price. Towàrd . that end, it incrementally consolidated . both the appearance an d the
substance of a take-over ofELSI's facilities, which enabled it ultitnately to.dictate the sale price.
Even before any bankruptcy auctions were held, the public at large had been informed that
the Government would take over ELSI's facilities. On 25 July 1968, the Minister of lndustry
announced to the Italian Parliament that the Government of Italy intended to take over ELSI's
plant through an IRI subsidiary (12}. On 13 November, after inconclusive negotiations with
Raytheon for a comprehensive settlement, the Government issued a press release announcing
(8) lt is a settled rule of state responsibility that the State is responsible for the actions and omissions of the
judicial and administrative authorities, including regional. and local government officials. See, e.g., G. ScHWARZENBERGER,
1 International Law,. pp. 625-627 (1957); RoussEAu, Droit international public, pp. 358, 374 (1953);
I. BROWNLIE, System of Law of Nations, State Responsibility (Part 1), p. 144 (1983); C. EAGLI!TON, The Responsibility
of States in International Law, pp. 70--73 (1928); and authorities cited at N. 15 and N. 17, Chapter II, pp. 74, 75;
Moreover, irrespective of its generai status for purposes of attribution, the actions of IRI in this case (and of its
subsidiaries) are also attributable to the Government of Italy, since IRI was not only owned and controlled by
the Government, but was also acting as an arm and agent of the Government .. The decision to take over ELSI's
assets through IRI was a centrai government decision, conceived even before the requisition and, subsequently
pùblicly announced as such. As stated by Christenson, Q The criteria for attributing conduct of [state-owned
enterprises] to the State seem to be ... attribution if the entity serves State purposes, thus becoming part of the
State's apparatus ». G. A. CHRISTENSON, « The Doctrine of Attribution in State Responsibility », International
Law of State Responsibility for Injuries to Aliens, p. 333 (R. Lillich, ed. 1983); see aiso, on attribution of acts of
agents generally, Chiessa case, 15 Reports of Internationai Arbitrai Awards, p. 399; x Oppenheim's Internationai
Law, p. 342 (8th ed. by H. Lauterpacht 1955); B. CHENG, Generai Principies of International Law as Applied by
International Courts and Tribunais, pp. 192--193 (1953).
(9) For other examples of cases involving allegations of a wrongful course of conduct. in connection with
bankruptcy proceedings see, e.g., Antoine Fabiani (France v. Venezuela), summarized in M. Whiteman, 3 Damages
in International Law, pp. I785--1788; Barcelona Traction, Light and Power Company, Limited, judgment, I.C.J.
Reportsi97o, p. 3; Timberlane Lumber Co. v. Bank of America, N. T. ~S. A., 549 F.2d 597, 6os (9th Cir. 1976);
Claims of « Salvador Commerciai Company » et al., 15 &ports of Internationai Arbitrai Awards, p. 467.
(10) Supra, p. 14; Annex 38.
(11) Supra, p. 14; Annex 39·
(12) Annex 46.
42 RASSEGNA DELL'AVVOCATURA DELLO STATO
that IRI-STET would take over ELSI at the Government's request (18). In response to this
announcement, workers at the Raytheon plant took down the name-plate tt ELSI » at the entrance
to the plant and put up a new name-plate tt STET >> ( 14). The IRI subsidiary which was to run
the plant, EL TEL, was formed in Palermo in December of 1968 (15). At the same time, IRI
announced its plans for rehiring workers when it reopened the plant in 1969 (16). All of these
developments were publicly reported (17). Thus, by the first scheduled bankruptcy auction
on r8 January 1969, the Government's take-over of ELSI's plant and assets was to all appea~
rances a certainty.
IRI, however, had not yet reached final agreement with the Trustee on its purchase of
ELSI's assets. Nor did it bid at the first auction (18). The first auction was for all of ELSI's
assets, with a minimum bid set at 5 billion lire (19). It appears that IRI was not interested in
purchasing all of ELSI's assets at this price, but only in purchasing the plant and certain related
equipment for some 4 billion lire (20). According to the President of the Sicilian Region, IRI
had reached agreement with the bankruptcy Trustee on such a sale as early as October 1968,
but the agreement had broken down over IRI's unwillingness to purchase any of ELSI's other
assets (21).
While these terms were not to IRI's liking and it boycotted the auction, it nevertheless
proceeded with its plans to take over ELSI. On 30 January it was publicly reported that IRI
had reached agreement with ELSI's former workers on a pian for rehiring (22). It also was repor~
ted that, faced with pressure from the former employees, IRI had agreed with the Trustee
and with the unions on an interim plan to reopen the plant under a lease arrangement, pending
agreement on the final terms of sale (23).
In late March 1969, therefore, ELTEL oftìcially proposed to the Trustee that it be permitted
to lease ELSI's plant for a period of eighteen months at an entirely nominai rate, without
any commitment whatsoever to purchase the plant or assets at any price (24). Raytheon's repre~
sentative on the creditors' comrnittee pointed out that, if such a lease were approved, EL TEL
would be in a position to dictate the terms of final sale (25). The lease nevertheless was approved,
on the ground that ELSI's plant needed to be operated and maintained (26).
U pon taking possession of the plant, EL TEL sought an d received perrnission to purchase
ELSI's work in process for less than one-half its appraised value (27). This first piecemeal sale
without open public bidding was justified in large part by the lease (28). Finally, with EL TEL
in possession of and operating ELSI's plant, the bankruptcy authorities agreed to sell the plant
and related equipment to ELTEL for 4 billion lire (US$6,4oo,ooo) (29). Thus, fora little over
(13) « Without prejudice to the undertaking of the STET Group to build in Palermo a new plant to manufacture
in the field of telecommunications, the IRI-STET Group, solicited by the Government ... , has
communicated its willingness to intervene in taking over the [ELSI] plant and in commencing also new
production >l (Annex 47).
(14) Annexes 48 and 49·
(15) Annex 26, para. 2o; Annex 59, p. 2.
(16) Annex 53·
(17) Annexes so, 53, and 54·
(18) Annex 52.
(19) Annex 51.
(20) Supra, p. 18; Annex 59, pp. 2-3.
(21) Ibid.
(22) Annex 54·
(23) Supra, p. I7; Annexes 54, 55 and s6.
(24) Annexes 6o and 61.
(25) Supra, p. 18; Annex 6o, p. 2.
(26) Annex 64, pp. 2-3. The need for such operation and maintenance was, it may be noted, entirely the
responsibility of ltalian authorities. As is discussed at Chapter IV, infra, instead of reopening and maintaining the
plant after the requisition, Sicilian authorities allowed the workers to occupy it. Thus, as a result of the requistiion
and the subsequent failure to protect the requisitioned property, the plant had been left idle and not maintained
for almost a year.
(27) Annex 6s.
(28) Supra, pp. 19-20; Annex 69.
(29) Supra, p. zo; Annexes 72 and 74•
MEMORIA DEL GOVERNO U.S.A. 43
4 billion lire ELTEL acquired ELSI's plant, equipment, and inventory, including work in
process - assets initially valued at over 12 billion lire (US$xg,2oo,ooo) (30).
Thus, the Government of Italy skillfully took advantage of its own commanding position
and its initial wrongful requisition to acquire ELSI's plant and assets at a reduced price for the
use of their own commerciai enterprise.
Their actions were discriminatory within the meaning of Artide l(b) of the Supplement.
As discussed at p. 33 above, the term « discriminatory », as used in the Treaty and Sup~
plement, expressly encompasses favored treatment for government-controlled enterprises.
The actions, moreover, contributed to the impairment of Raytheon's and Machlett's rights and
interests as investors. Having caused the bankruptcy, the Government of Italy further shaped
its results, to the detriment of Raytheon and Manchlett and the benefit of IRI.
This result was furthered, moreover, by yet another arbitrary and discriminatory actionthe
Prefect's failure to rule on the legality of the requisition until after EL TEL had acquired
ELSI's assets (31). During this entire period, the Prefect of Palermo refrained from ruling on
the lawfulness of the requisition. When the Prefect finally ruled on 22 August 1969, it was
sixteen months after the appeal had been filed, but only 48 days after EL TEL finally purchased
ELSI's assets. As discussed below, the Prefect's delay was exceptional. This delay was
« arbitrary », in that it was unfair, unreasonable, and unsupported by any legitimate considera~
tions. This delay was, moreover, « discriminatory », in that no comparable delay appears to
have occurred in any previous similar appeal brought by an Italian-controlled corporation (3 2).
Thus, the United States submits that, beginning with the requisition and throughout the
bankruptcy, Italian authorities engaged in a series of arbitrary and discriminatory measures
resulting in the impairment of Raytheon's and Machlett's investment rights and interests, in
violation of Artide l(b) of the Supplement.
( 30) Annex 13, Schedule Cl. See N. 38, Chapter IV, infra.
( 31) As discussed further in Chapter IV, infra, this delay in ruling also constituted a failure to afford the protection
due to Raytheon under Artide V of the Treaty.
(32) See further, discussion at pp. 52-53, infra.
CHAPTER IV
WRONGFUL TAKING OF INTERESTS IN PROPERTY
With the requisition, ltaly embarked on a course of activity aimed at acquiring the bulk
of ELSI's assets for a public enterprise at less than jair market value. In addition to
the Treaty violations indicated above, the requisition constituted a taking of property
without due process of law or just compensation, in violation of Article V (2) of the Treaty.
The requisition defimtively ended Raytheon and Machlett's ability to use and dispose of
assets which they owned through ELSI. I t led directly to a jorced bankruptcy sale of the
assets, primarily to an ltalian State enterprise at a price substantially below their jair
market price. The requisition, which later was jound unlawjul, thus constituted a taking
of property giving rise to an right to « .fust » compensation. Because the taking was
accomplished through means specijically proscribed by the Treaty- i.e., interjering with
management and contro[ and jailing to accord the guarantees of due process - just compensation
encompasses not only the actual market value of the property taken but also
any additional amount necessary to ojjset consequential damages of the taking.
SECTION 1. - The Taking of Interests in Property.
Artide V(2) of the Treaty provides that:
« The property of nationals, corporations and associations of either High Contracting Party
shall not be taken within the territories of the other High Contracting Party without due
process of law and without the prompt payment of just and effective compensation » (Emphasis
added).
The Protocol to the Treaty expressly extends this guarantee of compensation to '' interests
held directly or indirectly by nationals, corporations and associations of either High Contracting
Party in property which is taken within the territories of the other High Contracting Party »,
The provision aims « to assure that the investments of the ultimate party in interest, lying behind
the corporate facade, are safeguarded (l) ». In other words, the Treaty unambiguously protects
the investment interest of United States shareholders in Italian companies whose property is
taken by the Italian government.
The « taking >> of property to which the Treaty refers encompasses a multitude of activities
having the effect of infringing property rights. Under international law, a« taking » generally
is recognized as including not merely outright expropriation of property, but also unreasonable
interference with its use, enjoyment, or disposal. As Christie stated in 1962:
« Such cases as there are recognize the principle laid down by the commentators, that interference
with an alien's property may amount to expropriation even when no explicit attempt
is made to affect the legai title to the property, and even though the respondent State may
specifically disclaim any such intention (2) ».
(l) R. R. WILSON, United States Commerciai Treaties and lnternational Law, p. 201 (1960).
(2) G. C. CHRISTIE, « What Constitutes a Taking of Property Under Intemational Law? &, 38 British Yearbook
of lnternational Law, p. 307 at p. 309 (1962).
MEMORIA DEL GOVERNO U.S.A. 45
Subsequently, this principle has been repeatedly reaffirmed by international tribunals
and commentators (8). The recent and numerous awards of the Iran-United States Claims
Tribuna! on this question are illustrative. As stated by the Tribuna! in Starrett Housing, for
example:
« it is recognized in international law that measures taken by a State can interfere with
property rights to such an extent that these rights are rendered so useless that they must
be deemed to have been expropriated, even though the State does not purport to have
expropriated them and the legai title to the property formally remains with the originai
owner (4) )>.
Of particular relevance here, it repeatedly has been recognized that interference with management
and contro! sufficient to consti tute a << taking " of property will be considered to have
occurred where the foreign investor has no reasonable prospect of regaining management and
contro!. As stated by Dolzer, commenting on the rècent Revere case:
<< it cannot be doubted that a long-term interruption of effective contro! by the owner of
the use of property in its fundamental economie function would trigger the duty to compensate
also under the substantive international law concept of expropriation (5
) "·
In SEDCO, Inc. v. National Iranian Oil Company, for example, the Iran-United States
Claims Tribuna! found the appointment of << temporary " managers for an Iranian company
controlled by a United States corporation to be a taking of that corporation's shareholder interest
because << there [was] no reasonable prospect of return of contro! ... as of that date (6) "· The
Tribuna! noted, inter alia, that prior to the appointment of managers, Iran had announced an
intention to form a new government company to take over activities then performed by the
joint company SEDIRAN. It concluded that << the appointed managers were thus 'temporary'
(S) See, e. g., Certain German Interests in Polish Upper Silesia, Merits, J udgment N. 7, I9a6, P.C.I.]., Series
A, N. 7; Norwegian Shipowners' Claims (Norway v. United States of America), I Reports of International Arbitrai
Awards, p. 308 at p. 335; The United States of America on Behalf of Marguerite de]oly de Sabla v. The Republic
of Panama, reported at 28 American ]ournal of International Law, p. 602 (1934); R. HIGGINs, << The Taking of
Property by the State», 176 Recueil des cours, p. 259 at p. 324 (1982-III); L. SoHN and R. BAXTER, << Convention
on the International Responsibility of States for lnjuries to Aliens » ( « revised Harvard Draft Convention » ),
reprinted in F. V. GARcfA-AMADOR, L. SoHN and R. BAXTER, Recent Codification of the Law of State Responsibility
for Injuries to Aliens, p. 133 at p. 204 (1974); « OECD Draft Convention on the Protection of Foreign Property »,
7 International Legal Materials, p. II7 at pp. 125-126 (1968). See further, authorities cited at N. 4 and N. 5
infra.
(4) Starrett Housing Corp., et al. v. Islamic Republic of Iran, Awd. N. 32-24-1, 4 Iran-United States Claims
Tribuna! Reports (x983-III), p. 122 at p. I 54· See also, e.g., Thomas Earl Payne v. Islamic Republic of Iran, Awd.
N. 245-335-2, at p. xo (8 Aug. 1986) (« It is well settled in this Tribunal's practice, as elsewhere, that property
may be taken under international law through unterference by a State in the use of that property or with the
enjoyment of its benefìts »); Harza Engineering Company v. Islamic Republic of Iran, Awd. N. 19-98-2, 1 IranUnited
States Claims Tribuna! Reports, p. 499 at p. 504 (x981-1982) («[A] taking of property may occur under
internationallaw, even in the absence .of a formai nationalization or expropriation, if a government has interfered
unreasonably with the use of pròperty »); ITT Industries, Inc. v. Islamic Republic of Iran, Awd. N. 47-156-2
(Aldrich, concurring), 2 Iran-United States Claims Tribunal Reports, p. 348 at pp. 351-352 (1983-l); Tippets,
Abbet, McCarthy, Strattoil v. TAMS-AFFA Consulting Engineers of Iran, et al., Awd. N. 141-'7-2, 6Iran-United
States Claims Tribunal Reports, p. 219 at pp. 225-226 (1984-II); Foremost Tehran, Inc., et al. v. The Islamic
Republic of Iran, Awd. N. 220-37/231-x, p. 22 (II Apr. 1986); Phelps Dodge Corp., et al., v. Islamic Republic
of Iran, Awd. N. 217-99-2, p. 14 (19 Mar. 1986); International Technical Products Corp., et al. v.Islamic Republic
of Iran, et al., Awd. N. 196-302-2, p. 46 (xo Oct. 1985).
(5) Translation. R. DoLZER, << Nationale lnvestitions-versicherung und volkerrechtliches Enteignungsrecht:
Bemerkungen zum Revere Copper Fall », 42 Zeitschrift filr ausliindisches iiffentliches Richt and Viilkerrecht, p. 480
at p. 505 (1982). In Revere Copper and Brass, Inc. v. Overseas Private Investment Corporation (<• Revere&), the
Tribuhal found that Jamaica had engaged in« expropriatory action » because, in repudiating its long-term contractual
commitments to Revere, it had prevented the company from exercising effective contro! over its operation in J amaica.
Focussing on the decision-making process in the Jamaican subsidiary, it noted that «[f]reedom to make rational
management decisions is at the heart of effective contro!. Jamaica's actions were found to have undermined this
process notwithstanding the fact that Revere's subsidiary retained its formai rights and property. 56 International
Law Reports, p. 258 at pp. 29o-293, 295 (1980).
( 6) Awd. N. ITL 55-129-3, pp. 4o-41 (28 Oct. 1985).
4
46 RASSEGNA DELL'AVVOCATURA DELLO STATO
not in the sense that controi wouid be returned to SEDCO but oniy in the eventuaiity of
SEDIRAN becoming utterly defunct (1) "· Iran's clear intention not to return the company
to sharehoider controi from the time of appointment of managers was deemed evidence of a
taking as of that date.
Simiiarly, in Thomas Earl Payne, the Tribunai found that:
« The effect [of the appointment of' temporary' managers] is to strip the originai managers
of affected companies of all authority and to deny sharehoiders significant rights attached
to their ownership interest. While one of the purposes of the Law of 16 June 1979 is the
appointment of managers on a ' provisionai ' basis, the sum effect in this case was the
deprivation of any interest of the originai owners in the companies once they were made
subject to provisionai management by the Government (8) "·
By this estabiished standard, the requisition was a permanent taking. The Government of
Itaiy physically seized ELSI's property with the object and effect of ending Raytheon and
Machiett's management and controi, in order to prevent them from conducting the planned
liquidation. While the requisition order by its terms was affective for oniy six months, Italian
officials indicated at the time that it would be extended as necessary to prevent Raytheon and
Machlett from conducting the liquidation. They indicated that a new public enterprise would
be formed to manage ELSI on an interim basis, while IRI completed arrangements for acquiring
ELSI's assets. Thus, from the time the requisition was imposed, notwithstanding the pendency
of ELSI's pending appeal of the order (9), Raytheon and Machlett had no reasonabie prospect
of ever recovering management and control of ELSI, and had no alternative but to declare
bankruptcy (1°).
It also follows from the same principle and authority that, where interference with management
and control constitutes a taking, the scope of the taking is determined by the extent of
actual interference. The purported scope of the seizure, and the extent to which title to assets
is ultimately transferred to the government, are immaterial. In Certain German Interests in
Polish Upper Silesia, for exampie, the Permanent Court held that, by seizing a nitrate factory,
the Polish Government had also expropriated the patents and contract rights of the management
(7) Awd. N. ITL-55-129-3, pp. 42-43.
( 8) Awd. N. 245-335-2, p. II.
(9) A dose parallel may be found in the claim of Sabine G. Helbig, in which the Foreign Claims Settlement
Commission of the United States held that the taking had occurred when the property was seized by the Hungarian
Office of the Commissioner for Abandoned Property, notwithstanding the fact that a partially successful appeal
of that action was not decided unti! almost one year later. The Commission reasoned that << [t]he fact that the
authorities subsequently ordered that a portion of the property be returned to claimant, which order was never
executed, does not constitute a change in the date when the property was actually taken from claimant •>. In the
Matter of the Claim of Sabine G. Helbig, Claim N. Hung.-20590, Decision N. Hung.-941 (1958), Foreign Claims
Settlement Commission of the United States, Tenth Semiannual Report to the Congress, p. 51 at p. 52 (1959).
(H) I t is also well-established that governmental action to bring about a forced sale at less than fair market
value constitutes a taking, irrespective of whether the purchaser is an official entity. See, e.g., CHRISTIE, op. cit.,
at p. 327; E. LAUTERPACHT, << The Drafting of Treaties for the Protection of Investment •, in The Encouragement
and Protection of lnvestment in Developing Countries, p. 18 at p. 30 (International and Comparative Law Quarterly
Supplemental Publication N. 3) (1962); D. F. VAGTS, « Coercion and Foreign Investment Rearrangements •,
72 American]ournal of lnternational Law, p. 17 (1978); B. WssToN, << Constructive Takings' under lnternational
Law: A Modest Foray into the Problem of ' Creeping Expropriation' •, 16 Virginia J ournal of International Law,
p. 103 at pp. 133-148 (1975); B. WoRTLEY, Expropriation in Public lnternational Law, pp. 1-2, 127 (1959);
R. HIGGINS, op. cit., at p. 326; M. H. MULLER, « Compensation for Nationalization: A North-South Dialogue •>,
19 Columbia]ournal of Trausnational Law, p. 35 at p. 36 N. 6 (1981); Société du Chemin de Fer Ottoman de]affa
à ]erusalem et Prolongements v. United Kingdom, described in J. G. Wetter and S. M. Schwebel, «Some LittleKnown
Cases on Concessions •>, 40 British Yearbook of lnternational Law, p. 183 at p. 222 (1964); Case of Gowen
fS Copeland {United States of America V. Venezuela}, 4 J.B. MoORE, lnternational Arbitrations to Wlzich the
United States Has Been a Party, p. 3354 (1898) (« History of lnternational Arbitrations •>); Zwack v. Kraus Eros.
fS Co., 237 F. zd 255 {zd Cir. 1956) aff'g 133 F. Supp. 929 (Southern District of New York 1955); Firma Wichert
v. Wichert, Annua[ Digest and Reports of Public lnternational Law Cases, p. 23, (H. Lauterpacht, ed. 1948) (Switzerland
Federa! Tribuna!); << OECD Draft Convention on the Protection of Foreign Property >, op. cit., a t
pp. 125-126.
MEMORIA DEL GOVERNO U.S.A. 47
company (11). Similarly, in the Norwegian Shipowners' Claims case, the United States daimed
that it had requisitioned only partially completed ships, but was found to have expropriated
the contracts for completed ships, with which it interfered (12). More recently, in Starrett Housing
Corp. v. Islamic Republic of Iran, the Iran-United States Claims Tribunal found that in expropriating
the subsidiaries' physical assets, Iran incurred liability not only for the value of those
assets but also for the value of a construction project to be carried out by the subsidiary, the
profit which the daimant would have received in management fees and the loans daimant made
to the subsidiary for the purposes of the project (13). Similarly, in Revere the measure of loss
was Revere's total net investment in the Jamaican subsidiary, even though Revere formally
retained ownership, as Jamaica's interference with effective control of the enterprise necessarily
affected the entire operation (14
).
The requisition was thus a taking of all of ELSI's assets, even though the requisition order
did nòt expressly seize, nor did EL TEL ultimately acquire, all of these assets.
Accordingly, the United States submits that the requisition was a permanent taking of
Raytheon and Machlett's property interests in ELSI, within the meaning of Artide V(2) of
the Treaty.
SECTION 2. - Absence of Due Process.
The first protection set forth by Artide V(2) of the Treaty is the protection afforded by
« due process of law ». The meaning of « due process >> here is the due process required by
international law (15). The purpose of this international minimum standard is:
« to secure protection against arbitrary and unjust treatment in any particular in which
the Govemment of a country does not accord its own nationals as liberai treatment as that
which is recognized by intemational law (16) >>.
As discussed above, the process by which this taking was accomplished was not in accordance
with goveming standards of either domestic or intemational law. The requisition
without which this acquisition would not have been accomplished, was not only an « arbitrary
and discriminatory >> measure in contravention of the standards of treatment required by the
Treaty, but was actually contrary to Italian domestic law.
Moreover, Raytheon and Machlett were denied effective legai recourse against the requisition
order by the Prefect's exceptional delay of some sixteen months in ruling on their appeal.
As set forth in Chapter V, Section 1, injra, this unwarranted delay constituted a denial of
justice under international law.
The means by which the taking of ELSI's assets was accomplished thus did not meet
international minimum standards of due process, as required by Artide V(2) of the Treaty.
(11) Certain German lnterests in Polish Upper Silesia, op. cit., at p. 541. As the cases cited in N. Io relating
to « forced sales • demonstrate, it is immaterial whether the government itself ultimately acquires ali, or any, of the
expropriated assets.
(12) Norwegian Shipowners' Claims, op. cit., at p. 334·
(13) Starrett Housing Corp. v. lslamic Republic of Iran, op. cit., at pp. IS4-IS6.
(1 4) Revere, op, cit., at p. 296. See N. s, supra.
(15) See R. R. WILSON, << Property-Protection Provisions in United States Commercia! Treaties >, 45 American
J ournal of International Law, p. 83 at p. 99 (I95I); R. R. WILSON, The lnternational Law Standard in Treaties of
the United States, pp. IOI, 247 (1953).
(16) Memorandum of the So!icitor of the State Department discussing the meaning of a similar promise of
due process protection in a 1933 United States-Germany commercia! treaty, quoted in R. R. Wilson, « PropertyProtection
Provisions in United States Commercia! Treaties », op. cit., at p. 99, N. 84 (195I). See also, e.g., The
United States of America on behalf of Harry Roberts, Claimant v. The United Mexican States, Opinions of the Com·
missioners under the Convention concluded September 8, I9Z3 between the United States and Mexico, p. 100 at p. 105
(1927); The United States of America on behalf of George W. Hopkins v. United Mexican States, ibid., p. 42 at
p. 47; The United States of America on behalf of L. F. H. Neer and Pauline E. Neer, Claimants v. The United
Mexican States, ibid., p. 71 at p. 73; C. EAGLETON, Responsibility of States in International Law, pp. 83-84 (I928);
M. WHITEMAN, I Damages in International Law, pp. 22-23 (I937); E. BORCHARD, « The Minimum Standard of
Treatment of Aliens », 38 Michigan Law Review, p. 445 at p. 447 (1940); L. SoHN and R. BAXTER, Revised Harvard
Draft Convention, op. cit., at pp. 236-237. See also, authorities cited at Chapter V, n. 3·
48 RASSEGNA DELL'AVVOCATURA DELLO STATO
SECTION 3· - Absence of ]ust Compensation.
lt is a basic and well settled principle of international law that a State which takes the
property of an alien must afford « full n or « just n compensation for w ha t has been taken (17
).
This principle is affirmed in Artide V(2) of the FCN Treaty, which specifies that property
shall not be taken « without the prompt payment of just and effective compensation (18
) », Just
compensation ordinarily entails payment of the fair market value of the property taken, measured
at the time of the taking (19), excluding any diminution in value caused by the government action
against it, or the perceived risk thereof (20
).
In the Norwegian Shipowners' Claims, for example, « just compensation n was awarded
equivalent to the « real market value n of certain shipbuilding contracts (21
). More recently, the
Iran-United States Claims Tribunal has applied the «just compensation » clause of the 1955
Treaty of Amity between those two countries as requiring compensation equal to the fair market
value of property taken, defined as :
« the amount which a willing buyer would have paid a willing seller for the shares of a
going concern, disregarding any diminution of value due to the nationalization itself or
the anticipation thereof, and excluding consideration of events thereafter that might have
increased or decreased the value of the shares (22
) n.
At least where the taking is wrongful, moreover, as for instance when it violates a treaty
obligation, the compensation owed is not limited to the actual market value of the property
(17) See, e.g., Delagoa Bay Railway (United States of America and United Kingdom v. Portugal), summarized
in J. B. MooRE, op. cit., vol. 2, at p. I896; Factory at Chorzow, Merits, Judgment N. I3, I928, P.C.I.]., Series A
N. I7, pp. 677-678 (<• Chorzow Factory, Merits »); SEDCO, Inc. v. National Iranian Oil Co., Awd. N. ITL 59-
I29-3, p. II (27 Mar. I968); AGIP S.p.a. v. Government of the Popular Republic of the Congo, 67 International Law
Reports, p. 3I9 at p. 339; AMCO Asia Corporation v. Indonesia, 24 International Legai Materials, p. I022 at p. I037
(I985); I. BROWNLIE, Principles of Public International Law, p. 538 (I979); B. CLAGETT, << The Expropriation Issue
before the Iran-United States Claims Tribuna!: Is 'Just Compensation' Required by International Law or Not' •>,
I6 Law and Policy in International Business, p. 8I3 at p. 838 (I984).
(18) In United States practice, the terms « just >> and « prompt, adequate and effective » compensation are
used interchangeably. For example, in correspondence with the Mexican government setting forth the prompt,
adequate and effective standard, Secretary of State Cordell Hull used that phrase and the term « just compensation
» interchangeably. See G. H. HACKWORTH, 3 Digest of International Law, p. 654 (I942). United States courts
have also regarded the terms as synonymous. See, e.g., Banco Nacional de Cuba v. Chase Manhattan Bank, 505 F.
Supp. 412 (S.D.N.Y. I98o), aff'd as modijied, 658 F. 2d 875 (2d Cir. 1981). In the most recent public summary
of the internationallegal principles applicable to expropriation, the Department of State, through the Legai Adviser,
interpreted similar language in the 1955 Treaty of Amity with Iran in this fashion. See <<Memorandum of the
Department of State Lega! Adviser on the Application of the Treaty of Amity to Expropriations in Iran», 22 International
Legal Materials, p. I406-I407 (1983). See also, e.g., B. CLAGETT, op. cit., at pp. 84I-843.
(19) See, e.g., Chorzow Factory, Merits, op. cit., at p. 677; Norwegian Shipowners' Claims, op.cit. at p. 334;
Spanish-Moroccan Claims, 2 Reports of International Arbitrai Awards, p. 6I5; Lighthouse Arbitration, 23 International
Law Reports, p. 299 at p. 30I (1956); ITT Industries, I ne. v. The Islamic Republic of Iran, op. cit.; American
International Group, Inc. v. The Islamic Republic of Iran, Awd. N. 93-2-3, (I9 Dee. I983); 4 Iran-United States
Claims Tribuna! Reports, p. 96 at p. 102, (1983-III); Starrett Housing Corp. v. The Islamic Republic of Iran, op. cit.;
As discussed in Chapter VI, injra, full compensation also should include interest.
(20) See, e.g., American International Group v. The Islamic Republic of Iran, op. ci t., at pp. Io6-1o7; Artide
Io(2) of the Revised Harvard Draft Convention which describes just compensation for a taking of property « in
terms of the fair market value of the property ... unaffected by this or other takings or by conduct attributable to
the State and designed to depress the value of the property in anticipation of the taking •>; F. V. GARcfA-AMADOR,
L. SoHN and R. BAXTER, op.cit., p. I33 at p. 203 (1974); SEDCO, Inc. v. National Iranian Oil Co., Awd. N.
ITL 55-I29-3, p. 42 (28 Oct. 1985); ITT Industries, Inc. v. Islamic Republic of Iran, op. cit., at p. 355 (Aldrich,
concurring); American Law Institute, Second Restatement, sec. I88, comment b; CLAGETT, op. cit., at pp. 862-
863; R. LILLICH, « The Valuation of Nationalized Property by the Foreign Claims Settlement Commission >>, in
1 The Valuation of Nationalized Property in International Law, p. 95 at p. 97, N. 13 (R. Lillich ed. I972); MiiLLER,
op. cit., at p. 43; C. 0LMSTEAD, << Nationalization of Foreign Property Interests, Particularly Those Subject to
Agreement With the State>>, 32 New York University Law Review, p. 1122 at p. 1133 (1957); I. FoiGHEL, Nationalization
and Compensation, p. 250 (1964).
(21) Op. cit., at pp. 332, 339·
(22) INA Corporation v. The Government of the Islamic Republic of Iran, Awd. N. x84-161-I (13 Aug. I985),
at p. 3I. See also, American International Group, Inc. v. The Islamic Republic of Iran, op. cit., at p. Io2; Thomas
Earl Payne and The Government of the Islamic Republic of Iran, op. cit.
MEMORIA DEL GOVERNO U.S.A. 49
taken. Foliowing from the generai principle, elaborateci at greater length in Chapter VI, that
compensation for a wrongful act should correspond to restitutio in integrum, compensation for
a wrongful taking should redress ali of the injuries suffered as a result of the taking. In the
Chorzow Factory case, for example, the Permanent Court of lntemational Justice found Poland's
seizure of the factory to have been in violation of treaty obligations and therefore « wrongful »
as a matter of intemational law (23). The Court concluded that:
<< It foliows that the compensation due to the German Govemment is not necessarily
limited to the value of the undertaking at the moment of dispossession, plus interest to the
date of payment (24) »,
This principle is stili valid today. In TOPCO, for example, sole arbitrator Professor Dupuy
noted that: ·
« restitutio in integrum being in spite of everything the basic principle, it is this principle
which (in conformity with the rule laid down by the Permanent Court of lnternational
J ustice in the Chorzow Factory case ... ) will serve as the reference for calculating the amo un t
of a possible pecuniary indemnity ... (25) ».
Even in LIAMCO v. Libya, which is noteworthy among recent cases for the limited measure
of compensation applied (26), sole arbitrator Dr. Mahmassani unequivocably affirmed the
continuing validity of authorities following the Chorzow Factory principle in cases where a taking
is wrongful :
« The forementioned [authorities], whether in theoretical juristic opinion or in case law,
apply undoubtedly to cases of wrongful taking of property (27) ».
In the present case, therefore, the compensation provided for the taking of ELSI's assets
should have corresponded to restitutio in integrum, as discussed in further detail in Chapter VI,
injra. It is manifest that such full compensation was not provided. The Government of Italy
did not even pay fair market value for the property which it ultimately acquired, much less
for the whole of ELSI's assets which were taken.
For purposes of compensation for the taking of ELSI, ELSI should be valued as a going
concem as of I Aprii 1968. Notwithstanding the precarious financial situation which had led
the shareholders to decide to liquidate, ELSI remained an ongoing enterprise which had, in
addition to certain tangible assets, signifì.cant intangible assets which placed the fair market
value of the company appreciably above that of the physical assets standing alone. These
intangible assets included established customer and supplier relationships, developed and fully
functioning methods and processes, access to ali necessary patents, licenses, technical assistance,
and other technology, and an established name and reputation for quality products (28
).
(28) Chorzow Factory, Merits, op. cit., at p. 677.
(24) lbid.
(25) Texaco Overseas Petroleum Co./California Asiatic Oil Co. v. Government of the Libyan Arab Republic,
(Award on the Merits), 17 International Legai Materials, p. 1 at p. 35 (1977).
(26) Clagett, op. cit., at p. 858.
(27) Libyan American Oil Company (LIAMCO) v. Government of the Libyan Arab Republic, reprinted in 20
International Legai Materials, p. 1 at p. 70 (1981). See also, e.g., BROWNLIE, op.cit., at p. 539; D. P. O'CoNNELL,
2 lnternational Law, p. 1205 (1965); S. FRIEDMAN, Expropriation in International Law, p. 218 (1953); Chorzow
Factory, Merits, op.cit., at p. 47; M. H. MENDELSON, << Agora: What Price Expropriation? Compensation for Expropriation
>>; The Case Law, 79 American]ournal of lnternational Law, p. 414 at p. 416 (I985); G. WHITE, Nationalization
of Foreign Property, p. I54 (I96I). Authorities also recognize that breach of a stabilization clause in a
private contract gives rise to a<< special right of compensation >> for the party wronged. E. }IMÉNEZ DE ARÉcHAGA,
« International Law in the Past Third of a Century », I 59 Recueil des cours, p. I at p. 306 (I978-I); S. CHOWDHURY,
« Permanent Sovereignty over Natural Resources >>,in Permanent Sovereignty over Natura! Resources in International
Law, p. 2 at p. 39 (K. Hossain & S. Chowdhury eds. I98o-I984); F. V. GARcfA-AMADOR, The Changing Law of
International Claims, pp. 39I-395 (I984).
(28) Supra, pp. 6-7 and IO-II.
50 RASSEGNA DELL'AVVOCATURA DELLO STATO
Such intangible assets are of significant value to potential purchasers. As stated by Mr.
Scopelliti, former Chief Financial Officer and Controller of Raytheon's European management
subsidiary:
« In my experience, companies are often willing to pay a considerable sum simply for the
name, technology, and established customers of an electronics business, in addition to the
tangible assets. It is not unusual for buyers of going concerns in the electronics industry
to pay a price in excess of twice their book value (2 9) »,
Knowing this, Raytheon and Machlett had decided, in the liquidation, to preserve these
going concern aspects of ELSI's business, in order to sell it for its maximum value (30).
International tribunals have recognized that such intangible assets are valuable assets,
which must be considered in determining compensation owed for takeovers of companies. In
Chorzow Factory, for example, the Permanent Court of International Justice defined the
« undertaking », for purposes of valuation, as « including lands, buildings, equipment, stocks,
available processes, supply and delivery contracts, goodwill and future prospects (31) ». Similarly,
in American International Group, Inc. v. The Islamic Republic of Iran, the Iran - United States
Claims Tribuna! held that:
« the appropriate method is to value the company as a going concern, taking into account
not only the net book value of its assets but also such elements as goodwill and likely future
profitability, ... (32) ».
Under the particular circumstances of this case, and in view of the difficulty of independently
estimating at this time ELSI's fair market value as a going concern almost twenty years ago,
the United States submits that a fair measure of that value is given by the aggregate book value
of ELSI's assets as of 31 March 1968. This book value does not include ELSI's intangible
assets as a going concern, and the book values of other assets which are included are not, ipso
facto, fair market values (33). Taken as a whole, however, these omissions and adjustments counterbalance
each other, so that in this case book value is a fair measure of compensation (u). As
stated by Raytheon's former Vice-President and Controller, Mr. Arthur Schene:
« The aggregate book valuation of the assets represent a fair measure of their value on a
going coricern basis. Any downward adjustments in the valuation of specific assets would
have been more than offset by a reasonable amount of goodwill and the upward adjustment
of other assets. For example, had IRI moved in in 1968 and taken over the operation with
their ability to open up markets, at least full asset value should have been realized by
them (35) »,
In short, as of I Aprii 1968, Italy expropriated ELSI as a going concern. Raytheon and
Machlett planned to liquidate it as a going concern, and Italy planned to operate it as a going
concern. Italy's method of expropriation, however, served as a means to avoid paying full
campensation for ELSI's assets at going concern value.
(29) Annex I 7, para. 9·
(30) Supra, pp. Io-II; Annex IS, para. so.
(31) Chorzow Factory, Merits, op. cit., at p. 5I (Emphasis added).
( 32) American International Group, Inc. v. The Islamic Republic of Iran, Award N. 93-2-3, op. cit., at p. 2I.
( 33) In principle, <• book value >) does not reflect going concern or fair market value, because it does not take
into account the capacity of an asset to produce future income. Compensation at book value is therefore ordinarily
considerably less than full compensation. C. F. Amerasinghe, for example, describes book value as << the usual
minimum >) in state practice. C. F. AMERASINGHE, << The Quantum of Compensation for Nationalized Property •,
in 3 The Valuation of Nationalized Property in International Law, p. 9I at p. 126 (R. Lillich, ed. 1985). In this
particular case, however, in view of the considerations set forth above, book value is in fact a fair measure of going
concern value.
( 34) The only other contemporaneous estimate of the market value of ELSI's assets is the minimum liquidation
value, which had been prepared on a << quick sale >) basis, deliberately omitting intangible assets and understating
others. Supra, p. I 1. It should be considered a assured minimum value and does not represent a viable
alternative to book value as an approximation of going concern value.
(85) Annex 13, para. I5,
MEMORIA DEL GOVERNO U.S.A. 51
As of 30 March 1968, ELSI's book value was 17.05 billion lire (36). The Trustee ultimately
received, however, less than only 6.4 billion lire (US$ro,240,ooo) for ELSI's assets (37
). ltaly
itself paid only s'i.~htly more than 4 billion lire (US$6,4oo,ooo) for the assets which it ultimately
acquired - assets which had a book value of r2 billion lire (US$r9,20o,ooo) (38
). The value
of other assets, including substantial accounts receivable which were never collected, was lost
in the requisition and bankruptcy process. In addition, because the expropriation was accomplished
by wrongful actions in violation of the Treaty and Supplement, just compensation in
this case must include not only compensation for the value of property taken, but also for the
other damages resulting from the wrongful actions. As discussed in Chapter VI, infra, this
includes in particular substantial legai expenses incurred by Raytheon in connection with the
bankruptcy, in defending against ltalian court actions by ereditar banks, and in pursuing its
claim for redress. Thus, there can be no doubt that Raytheon and lVIachlett were denied payment
of fair market value for the property which was effectively taken on I Aprii 1968 by the requisition.
Accordingly, the United States submits that Italy has taken Raytheon and Machlett's interests
in ELSI, without due process or payment of just compensation, in violation of Artide
V(2) of the Treaty.
(36) Annex 13, para. 15. See also, Annex 30, Attach ment B, Schedule A.
(37) See Annex 13, Schedule CI.
(38) lbid. It is difficult to determine precisely from the available information how many of ELSI's tangible
assets were left in the plant by the time Italy completed its acquisition. However, it appears that Italy acquired,
in addition to the plant and equipment, nearly al! of the remaining inventory. As~ shown in Schedule CI,
« inventory & includes work in process and finished goods as well as materials and supplies.
CHAPTER V
FAILURE TO PROVIDE PROTECTION AND SECURITY
SECTION x. - Delay in Ruling on the Challenge to the Requisition Order.
When the Government of Italy requisitioned ELSI's plant and equipment on I Aprii
I968, ELSI promptly appealed to the Prefect of Palermo to set aside this order. The Prefect,
however, did not issue his ruling until 22 August I969. In the meantime, ELSI had gone bankrupt
and the Government of Italy had completed the purchase of ELSI's plant and equipment.
As discussed above, this delay in ruling was an arbitrary and discriminatory measure which
impaired Raytheon's and Machlett's investment rights and interests. Under the circumstances,
moreover this delay constituted a denial of justice - more specifically, a denial of procedura!
justice (l) - in violation of paragraphs (I) and (3) of Artide V of the Treaty (2).
Artide V(r) of the Treaty states in pertinent part:
" The nationals of each High Contracting Party shall receive, within the territories of the
other High Contracting Party, the most constant protection and security for their persons
and property, and shall enjoy in this respect the full protection and security required by international
law » (Emphasis added).
This explicit recognition and adoption of the international law minimum standard of the
treatment due to aliens (3) is enhanced by Artide V(3), which specifies that the protection and
security referred to in Artide V( I), assuming" compliance with applicable laws and regulations »,
shall be no less than that due under national or most-favored-nation standards of treatment.
Together, Artides V(I) and V(3) obligate the Government of Italy to afford to United States
nationals the international standard, the most-favored-nation standard, or the national standard
of protection of property - whichever is highest.
It is well established that, as a matter of generai internationallaw, unreasonable or unwarranted
delay in ruling o n a case violates the international standard of treatment. In the I 896 decisi o n
in the Fabiani case, for example, the President of the Swiss Confederation, acting as sole arbitrator,
found that:
" U pon examining the generai principles of international la w concerning the denial of
justice, that is to say the rules common to most legai systems or laid down by doctrine,
(l) The concept of <1 denial of procedura! justice » includes injury resulting from a denial of procedura! faimess,
and due process in relation to judicial proceedings. See, e.g., The American Law Institute Second Restatement
sec. r8r (1965). (See also Tent. Draft N. 7, sec. 7II, comment a).
(2) This denial of procedura! justice is also further evidence that Italy's actions were arbitrary in violation
of Artide I of the Treaty Supplement. See Chapter II, supra.
( 3) The existence of such an international standard of treatment was reaffirmed most recently by this Court
in its Order of 15 December 1979 in the Hostages Case, which refers to <l the treatment due to [nationals] under
generai rules of international law as aliens within the territory of the foreign state ». United States Diplomatic
and Consular Staff in Tehran, Provisional Measures, Order of 15 December 1979, I.C.3. Reports 1979, p. 7 at p. 14,
See also, e.g., Certain German Interests in Polish Upper Silesia, Merits, judgment N. 7, 1926, P.C.I.]., Series A,
No. 7, p. 510 at pp. 523-524; E. RooT, <l The Basis for Protection to Citizens Residing Abroad >>, 4 American
]ournal of International Law, p. 517 at p. 527 (1910); C. EAGLETON, Responsibility of States in International Law,
p. 83-84 (1928); M. WHITEMAN, I Damages in International Law, pp. 21-22 (1937); E. BoRCHARD, « The ' Minimum
Standard' of the Treatment of Aliens >>, 38 Michigan Law Review, pp. 445 et seq. (1940); A. H. RoTH, The Minimum
Standar.d of International Law Applied to Aliens, pp. 122-123 (1949); Revised Harvard Draft Conven'ion, reprinted
in F. V. GARCIA-AMADOR, L. SOHN and R. BAXTER, Recent Codijication of the Law of State Responsibility for Injuries
to Aliens, pp. 236-237 (1974).
MEMORIA DEL GOVERNO U.S.A. 53
one concludes that denial of justice indudes not only the refusal of a judicial authority
to exercise its functions, ... but also persistent delays on its part in rendering judgment (4) >>.
As · Freeman condudes from the numerous arbitrai awards in support of this point in his
definitive. work, The International Responsibility of States for Denial of J ustice :
<< <;\llpable delay on the part of the courts in disposing of cases involving foreigners is one
of the. most typical instances of denial of justice and as .such engages the State's international
responsibility. This point has long been settled.... In effect, ever since the era of private
reprisals it has been axiomatic that unreasonable delays are properly to be assimilated to
absolute denials of .access (Il) ».
Ultimately, the premise that a delay in ruling can amount to a denial of justice rests on their
equivalence in fact. As Freeman notes:
<< i t is obvious that the failure to conduct proceedings with reasonable diligence and despatch
may produce the same dire effects for the daimant as though he had been denied a judicial
remedy altogether (6) ».
The delay of the Prefect in ruling on ELSI's appeal of the requisition of its assets constitutes
a culpable denial ofjustice by this standard. Judged by its practical effect, it constituted a denial
of any judi:cial remedy. When the Prefect finally ruled in ELSI's favor on 22 August 1969,
seventeen months after the appeal was filed, the Government of Italy had completed its acquisition
of ELSI's plartt and equipment. Even though the ruling was ultimately in ELSI's favor, it
was too late to have any remedial effect. Not only had any possibility of a voluntary, orderly
liquidation been extinguished long before, but also there remained no chance that the ruling
might affect the acquisition of ELSI's assets through the bankruptcy (7).
The delay in ruling appears, moreover, to be of an exceptional nature not justified by any
legitimate consideration. Aprompt ruling on such an appeal was not only possible, but customary.
In all previous cases of which the United States is aware, in which the x865 requisition law had
been invoked, the Prefect of the relevant jurisdiction had promptly quashed the requisition (B).
ELSI's appeal did not present any special complications justifying this exceptional delay, nor
is · any reasonable explanation for it apparent. The only condusion which can be drawn under
the circumstances is that this delay was unwarranted and unreasonable, either as the result
of negligent or willful action.
In condusion, the United States submits that the delay in ruling on this appeal constituted
a failure to accord the << :tnost constant protection and security » and « the full protection and
security required by international law » as required by Artide V( x). Moreover, because the
delay was far in excess of the delay experienced in prior suits involving companies owned by
Italian nationals, it also constituted a failure to accord a national standard of protection, as
required by Artide V(3).
SECTION 2. - Failure to Afford Protection to ELSI's Plant and Premises.
As discussed above, once ELSI's plant and equipment had .bèen requisitioned, ELSI's
employees began an occupation of the premises that continued, so far as can be determined,
(4) Translation. Award of the President of the Swiss Confederation in the case of Fabiani, in J, B. MoORE,
5 History and Digest of the International Arbitrations to which the United States Has Been a Party, p. 4878 at
p. 4895 (1898).
( 6) A. V. FREEMAN, The International Responsibility of States for Denialof ]ustice, p. 242 (1938). See also,
e.g., The United States of America on behalf of B. E. Chattin, Claimant v. The United Mexican States, Opinions of
Commissioners, p. 422 at p. 432 (1927); C. DE VrsscHER, <<Le déni de justice en droit international », in 52 Recueil
des cours, p. 362 at p. 397 (1935); G. ScHWARZENBERGER, I International Law, p. 6zx (3rd ed., 1957); RoussEAU,
5 Droit international public, p. 69 (1983); and American Law lnstitute, Second Restatement, sec. x8x(h).
(6) FREEMAN, op. cit., at p. 244.
( 7) Supra, p. 21. As noted at p. 17, supra, the Prefect was personally involved in negotiations between IRI
and the Trustee.
(B) In most other cases, the requisition was quashed in a matter of days and in no case more than thirty days.
In this case, the Prefect ruled more than sixteen months after the appeal was filed. Annex 26, para. 10.
54 RASSEGNA DELL'AVVOCATURA DELLO STATO
up to the re-opening of the plant by EL TEL. This occupation, combined with the idleness
of the plant during the requisition, had at least two injurious consequences: i t resulted in a
deterioration of the plant and related materia! and equipment, and it impeded the Trustee's
e:fforts to dispose of the plant (9).
The occupation appears to have had the tacit approvai of local authorities, who made no
effort to prevent orto end it, or otherwise to protect the premises (10). Either the legai custodians
of the plant - fìrst the Mayor, under the requisition, and subsequently the bankruptcy authorities
- did not seek, or the police did not provide, the protection which previously had been
provided. This failure to a:fford protection constituted a violation of Artide V( I) of the Treaty.
As discussed above, Artide V(r) of the Treaty establishes Italy's obligation to provide
" the most constant protection and security » to the property of United States nationals, and in
particular « the full protection and security required by international law ». One well-established
aspect of the international standard of treatment is that States must use " due diligence » to
prevent wrongful injuries to the person or property of aliens within their territory. If a State
fails to use due diligence to prevent such injury, then it is responsible for this omission and is
liable for the ensuing darnages (11).
The obligation of a State to exercise " due diligence » does not require that it prevent any
injury whatsoever. Rather, the obligation is generally understood to require that a State take
reasonable actions within its power to avoid injury when it is, or should be, aware that a risk
of injury exists (12). The precise degree of care that is <( reasonable » or "due» depends in part
on the circumstances (13). Where, however, a State entirely fails to use the means at its disposal
to provide protection, there can be no doubt that adequate protection has not been provided.
Thus, for example, in the Hostages Case, this Court determined that Iran had breached its
obligation to protect foreign nationals, based on the fìnding that Iran was aware of the need
for action and had failed to use the means at its disposal to comply with its obligations (14).
Similarly in this case, Italy should be charged with knowledge of the need for action to
protect the plant and found to have failed to use the means at its disposal to provide appropriate
protection. The occupation began only after the Mayor - an Italian government official -
had assumed custody of the plant. Italian officials had been following ELSI's situation dosely
and were well aware of the threat of occupation before it occurred. Prior to the requisition,
the police protected the plant, keeping strikers o:ff the premises and allowing only persons with
legitimate purposes to enter. The requisition was issued in part to temper the expected outcry
from the workers over the actual dosing of the plant. Italian officials thus foresaw the situation
worsening, yet at the same time they actually decreased their physical protection of the plant e5).
Having deprived Raytheon of the right and ability to protect its own property, Italy had
a special duty to protect them against hostile actions (16). Moreover, having itself assumed custody
( 9) Supra, p. r 3; Ann,ex 79, p. 3; see also Annex 26, paras. r7-r8.
(lO) The failure of Italian authorities to afford protection after the requisition unti! at least the date ELSI
filed a petition in bankruptcy is addressed in the Affidavit of Mr. Merluzzo, Annex 21, paras. 20 and 23. Raytheon
and Machlett have little direct knowledge of events in Palermo after the bankruptcy. According to the later statements
of Avv. Biscanti and the Trustee, however, as reflected in Annexes 26 and 79, it appears that the occupation
continued uninterrupted unti! EL TEL acquired the plant.
(11) See, e.g., Case of the Alabama and her Tender, the Tuscaloosa, summarized in MooRE, vol. 5, op.cit., p. 4144
at p. 4160; E. BORCHARD, Diplomatic Protection of Citizens Abroad, p. 217 (I9IS); EAGLETON, op. cit., at p. 88;
RoussEAU, op. cit., at pp. 74-75; I Oppenheim's International Law, pp. 365-367, 8th ed. by H. Lauterpacht (I955);
R. LILLICH and J. PAXMAN, <<State Responsibility for Injuries to Aliens Occasioned by Terrorist Activities •>, 26
The American University Law Review (I977), p. 2I7, at pp. 225-231 and 240-245; GARCIA-AMADOR, op.cit., p. 27;
American Law Institute, Second Restatement, sec. I83; commentary to Artide I I of International Law Commission
Draft Articles, II Yearbook of International Law, I975, p. 70-82.
(1 2) See, e.g., authorities cited at N. II, supra.
(13) See, e.g., EAGLETON, op. cit., at p. 88, GARCÌA-AMADOR, op. cit., at p. 27.
(14) United States Diplomatic and Consular Staff in Tehran, ]udgment, I. C.]. Reports I98o, p. 3 at pp. 32-33.
The Court also referred to Iran's awareness of its obligations. Where a treaty obligation is at issue, however, a
State must normally be presumed to be aware of its obligations. See also, e.g., William E. Chapman (USA)
v. United Mexican States, 4 Reports of International Arbitrai Awards, p. 632 at p. 639; BoRCHARD, op.cit., at p. 2I3;
authorities cited at N. II, supra.
(15) Supra, p. I3; Annex 2I, paras. 20-21.
(16) Cf. Case of Enrique Rau, summariz<ld in M. WHITEMAN, op. cit., vol. r, p. 26 at p. 27.
MEMORIA DEL GOVERNO U.S.A. 55
of the plant, Italy was responsible for its maintenance and care. lnstead of enhancing plant
security un der the requisition, however, I talian officials allowed the occupation to be gin an d
continue without interference and made no apparent effort to protect the premises from the
injurious effects of occupation.
Thus, following the requisition, governmental authorities failed to meet even minimum
standards of protection for the property in question. Italy failed to use the meaos at its disposal
to continue to keep plant premises free of unauthorized persons, or so far as appears, to preserve
and maintain the plant and equipment in any way. Accordingly, the United States submits
that the Government of Italy has failed to provide the requisite protection to ELSI's premises
in violation of its obligations under Artide V(x) of the Treaty.
CHAPTER VI
THE COMPENSATION DUE TO THE UNITED STATES
SECTION 1. - The Duty to Pay Compensation.
It is a fundamentai principie of internationai Iaw that a State which has breached its internationai
obligations incurs a duty to make reparation to the injured State (1). This generai
principie applies, inter alia, to obiigations assumed by treaty. As the Permanent Court of lnternationai
Justice stated in the Chorzow Factory case, « [i]t is a principie of internationaiiaw that
the breach of an engagement invoives an obiigation to make reparation in an adequate form (2) ».
The Permanent Court regarded « reparation as the corollary of the vioiation of the obligations
resulting from an engagement between States (3) ». Even absent an express provision in the
internationai agreement providing for reparation in the event of breach, the offending State is
obiigated to make reparation. As the Permanent Court stated in Chorzow, « Reparation ... is
the indispensabie compiement of a faiiure to appiy a convention and there is no necessity for
this to be stated in the convention itseif (4) ».
This Court has reaffirmed the principie that a State is entitled to reparation for the vioiation
of its treaty rights on severai occasions. In the United States Diplomatic and Consular Staff
in Tehran case, for exampie, the Court heid that the United States was entitled to reparation
from Iran for the Iatter's breach of its treaty obiigations:
« [T]he Court fìnds that Iran, by committing successive and continuing breaches of the
obligations Iaid upon it by the Vienna Conventions of 1961 and 1963 on Dipiomatic and
Consuiar Reiations, the Treaty of Amity, Economie Reiations, and Consuiar Rights of
1955, and the applicabie ruies of generai internationai Iaw, has incurred responsibility
(l) As defined by Jiménez de Aréchaga, « reparation is the generic term which describes the various methods
available to a State for discharging or releasing itself from ... responsibility. The forms of reparation may consist
in restitution, indemnity or satisfaction ». E. }IMÉNEZ DE ARÉCHAGA, << International Law in the Past Third of a
Century », I 59, Recueil des cours, p. I at p. z8s (I978). In the Corfu Channel case, this Court stated that it follows
from the establishment of the responsibility of a State for the breach of an international obligation << that compensation
is due>>. Corfu Channel, Merits,]udgment, I.C.j. Reports 1949, p. 4, at pp. 23-24. See also, e.g., Reparation
for Injuries Suffered in the Service ofthe United Nations, Advisory Opinion, I.C.j. Reports 1949, p. I74, at p. 184;
United States Diplomatic and Consular Staff in Tehran, judgment, I.C.J. Reports 1980, p. 3 at pp. 41-42; Artide I
and commentary thereto of Part I of the International Law Commission's Draft Artides on State Responsibility,
II Yearbook oj the International Law Commission, 1973, pp. 173-176, and Artide 6(2) of Part 2 of the draft articles,
as proposed by the Special Rapporteur, II Yearbook of the International Law Commission, 1984 (Part Two), p. IOo,
N. 322; American Law Institute, Second Restatement secs. I64, 165, 168 (1965); Garcia-Amador's Draft Articles
on State Responsibility, in F. V. GARcfA-AMADOR, L. SoHN and R. BAXTER, Recent Codijication of the Law of State
Responsibility for Injuries to Aliens, p. 86 (1974); Revised Harvard Draft Convention, ibid., at p. I43·
(2) Factory at Chorzow, furisdiction, Judgment N. 8, 1927, P.C.I.]., Series A, N. 9, p. 21 (<< Chorzow Factory,
Jurisdiction >>). See also, e.g., Interpretation of Peace Treaties With Bulgaria, Hungary andRomania, Second Phase,
Advisory Opinion, I.C.j. Reports 1950, p. 221 at p. 228; Phosphates in Morocco, judgment, 1938, P.C.I.]., Series
A/B, N. 74, p. Io, at p. 28; Artide I of Chapter I of the International Law Commission's Draft Artides on State
Responsibility, II Yearbook oj the International Law Commission, I973, pp. I73-I76; Artide 17, II Yearbook of
the International Law Commission, 1980 (Part Two), p. 32; Artide 5(2) (a) of Part 2 Report of the International
Law Commission, 1985, pp. 53-54, and proposed Artide 6(2), II Yearbook oj the International Law Commission,
1984 (Part Two), p. xoo, N. 322.
(3) Chorzow Factory, Merits, P.C.I.]., Series A., N. I7, p. 27.
(4) Chorzow Factory, Jurisdiction, op. cit., at p. 21.
(5) United States Diplomatic and Consular Staff in Tehran, op. cit., pp. 41-42.
MEMORIA DEL GOVERNO U.S.A. 57
towards the United States. As to the consequences of this finding, it clearly entails an
obligation on the part of the Iranian State to make reparation for the injury thereby caused
to the United States (5
) "·
This principle has been repeatedly recognized by decisions of other international fora (Il),
by international commentators (7), and in efforts to codify international law (B).
SECTION 2. - The Measure of Compensation.
A) Compensation may be measured by the injury to Raytheon and Machlett.
While the State on the international piane always represents its own interests, the compensation
tò which it is entitled for breach of a treaty obligation can be measured not only by
injuries suffered directly by the State, but also by ìnjuries to its nationals as a result of the
wrongful action. This principle was confirmed also by the Permanent Court in the Chorzow
Factory case. In determining the measure of damages due the German Government for Poland's
expropriation of German nationals' property in violation of its treaty obligations, the Court
stated:
<< It is a principle ofinternationallaw that the reparation of a wrong [to a State] may consist
in an indemnity corresponding to the damage which the nationals of the injured State
have suffered as a result of the act which is contrary to internationallaw .... The reparation
due. by a State to another does not however change its character by reason of the fact that
it takes the form of an indemnity for the calculation of which the damage suffered by a
private person is taken as the measure.... Rights or interests of an individuai, the violation
of which rights causes damage, are always in a different plane to rights belonging to a State,
which rights may also be infringed by the same act. The damage suffered by an individuai
is néver therefore identica! in kind with that which will be suffered by a State; it can only
afford a convenient scale for the calculatìon of the reparation due to the State (9
) "·
International arbitrators and commentators have similarly recognized that damage to the
national as a result of a State's treaty violations may serve as a measure of the compensation
owed to the injured State. In the Forests of Rhodope case, for example, the arbitrator held that
Bulgaria's expropriation of Greek nationals' property in Rhodopia violated the Treaty of
Neuilly (1°). In determining the proper measure of compensation due Greece, the arbitrator
held that << [t]he damage suffered by the Greek nationals furnishes an equitable measure of the
reparation due to the Greek government (11). As noted by Schwarzenberger, while «[t]he damage
su:ffered by the State is not necessarily limited to that of the individuai ... this may o:ffer a convenient
measure of the minimum of damage for which reparation is due (12
) "·
In these cases, as in the present case, the treaty provisions in question had only an indirect
bearing on the direct financial rights of the respective governments, and were aimed rather
at the protection of the parties' respective nationals. The United States accordingly submits
(6) See, e.g., Affaire des ForOts du Rhodope Centrai (Fond}, 3 Reports of lnternational Arbitrai Awards, p. 1405
at p. 1436; Award Concerning the Claim of George]. Salem, z Report$ of lnternational Arbitrai Awards, p. 1165
at p. 1194·
(7) See, e.g., x Oppenheim's lnternational Law, sec. I56 (8th ed., by H. Lauterpacht I955); A. V. FREEMAN,
The lnternational Responsibility of States for Denial of] ustice, p. 57Z (1938); A. D. McNAIR, z Law of Treaties,
pp. 539-540, 574 (I96I),
(B) See, e.g., authorities cited at N. I, supra.
( 9} Chorzow Factory, Merits, op. cit., at pp. z7-z8.
(10) I933-I934 lnternational Law Reports, pp. 9I et seq.
(11) Jbid., p. lO I;
(12) G. ScHWARZENBERGER, I lnternational Law, p. I4I (3d. ed. 1957). Freeman agrees that « the degree of
public injury - or rather the reparation sought for the violation of a public right - is determined by the extent
of the private loss ~. FREEMAN, op. cit., at p. 576.
58 RASSEGNA DELL'AVVOCATURA DELLO STATO
that the Iosses suffered by Raytheon and Machiett as a result of Itaiy's vioiation of the Treaty
are the most appropriate and oniy convenient measure of damages to the United States for
vioiation of its rights under the Treaty in this case (13).
B) All of the injuries suffered by Raytheon -and Machlett should be included in the measure of compensation.
-
1. - The Genera l Principle
The proper measure of compensation is that which redresses ali of the injuries occasioned
by the commission of the internationai wrong. The Permanent Court enunciateci this basic
principie in the Chorzow Factory case:
" The essentiai principie contained in the actuai notion of an illegai act - a principie which
seems to be estabiished by internationai practice and in particuiar by decisions of arbitrai
tribunais - is that reparation must, as far as possibie, wipe out all the consequences of the
illegai act and reestabiish the situation which wouid, in all probabiiity, have existed if that
act had not been committed (14) n.
A State may discharge its duty to make reparation by impiementing measures designed to
reestablish the situation prior to the wrongfui act or omission, i.e. restitutio in integrum <16>.
Where, however, it is not possibie to restore the state of facts that wouid have existed if the
uniawfui act had not been committed, or such restoration does not fully redress the injury
caused by the State's uniawfui act, damages are awarded in lieu of restitution or as a suppiement
thereto (16). As stated by the Permanent Court:
" Restitution in kind, or, if this is not possibie, payment of a sum corresponding to the
vaiue which restitution in kind wouid bear; the award, if need be, of damages for Ioss
sustained which wouid not be covered by restitution in kind or payment in piace of it -
such are the principies which shouid serve to determine the amount of compensation due
for an act contrary to internationai Iaw (17) "·
This principie has been affirmed and applied repeatediy by pubiic internationai tribunais (18)
and private internationai arbitrai bodies (19). The award in the Fabiani case, for exampie, was
(13) As used here throughout, << the damages suffered by Raytheon ~. refers not only to Raytheon's direct
financialloss, but also to some US$ 55I,300 in losses suffered by its wholly-owned subsidiary, Raytheon Service
Company, as detailed in Annexes I3 and I4.
(14) Chorzow Factory, Merits, op. cit., at p. .
( 16) Texaco Overseas Petroleum Co.JCalifornia Asiatic Oil Co. v. Government of the Libyan Arab Republic
(Award on the Merits) (<< TOPCO v. Libya ~), I7 International Legai Materials, p. I at p. 36 (I977).
(16) TOPCO v. Libya, op. cit. at p. 36. See also, e.g., F. V. GARcfA-AMADOR, 2 The Changing Law of lntet·national
Claims, p. s8o (I984); Claim of Thomas W. Mather, Surviving Partner of Mather & Glover, summarized
in M. WHITEMAN, 3 Damages in International Law, p. 202I (I943).
(17) Chorzow Factory, Merits, op. cit., at p. 47· The application of this principle in cases of expropriation is
discussed at p. 46, supra.
(18) See, e.g., Norwegian Shipowners' Claims, I Reports of International Arbitrai Awards, p. 308, at p. 338;
Martini Case, IO Reports of International Arbitrai Awards, p. 644, at pp. 665-669; Opinion in the << Lusitania ''
Cases, 7 Reports of lnternational Arbi'tral Awards, p. 32, at p. 39; Cheek Case, J. B. MooRE, 5 History of International
Arbitràtions, p. so68, at p. 5071 (1898); Claim of Frances !rene Roberts, Administratrix of the Estate and Sole Heir
at Law of William Quirk, Deceased, summarized in WHITEMAN, op. cit., at p. 1821; Claim of Robert H. May v.
Guatemala, Foreign Relations of the United States, p. 648, at p. 674 (I90o); Claim of Peter Harmony, by his Attorney,
Leonard S. Suarez, and Assignees, summarized in Whiteman, op.cit., at p. 2021; Case of Patrick Cootey, summarized
i11 Moore, op.cit., vol. 3, at p. 2770; W alter Fletcher Smith Claim, 2 Reports of International Arbitrai Awards, p. 915.
(19) For recent international arbitrations involving States and private parties, see, e.g., AGIP Company v.
Popular Republic of the Congo (<< AGIP ~}, 67 International Law Reports, p. 3I9, at p. 339; American lndependent
Oil Co. (AMINOIL) v. The Government of the State of Kuwait (« AMINOIL v. Kuwait >>), 2I lnternational Legai
Materials, p. 976, at p. 1031 (I982); TOPCO v. Libya, op.cit.; BP Exploration Co. (Libya Ltd.) v. Government
of the Libyan Arab Republic, 53 International Law Reports, p. 297, at p. 347 (1974); Libyan American Oil Co. v.
Government of the Libyan Arab Republic, 20 International Legai Materials, p. I, at p. 7I (I977); AMCO Asia CGTp.
v. The Republic of Indonesia, 24 International Legai Materials, p. 1022, at p. 1037 (I985).
MEMORIA DEL GOVERNO U.S;A. 59
premised on facts similar in this respect to tbe ones in this case (20
). In Fabiani, Venezuelan
authorities refused to execute the terms of a private arbitrai award against certain Venezuelan
nationals in favor of the claimant. Fabiani was forced to declare bankruptcy because he did
not have the benefit of money that would have been transferred to him had the goverliment
enforced ~arlier • the award. Tbe award in the Fabiani case included the value of ali. property
an,d uncollecte!l note$ that F'abiani :would bave. realized had.the foreign judgments been executed
against hi$ debtor, the experises be incurred seeking to execute the arbitrai award, and the
person,alJnjury causeg by the denial of ju$tice whicb brought. about his hankruptcy. The
bankl'uPtCiy, the ce~sationof Fabiani's commerciai operations, and his financial embarra$sment
ali vv~re cqn,sìdereg>tlJ.e << direct consequence of the denials. of justice, since Fabiani was thrown
into b!tnkrùptcy a t Maracaibo .. : for the failure of sums rriuch lower than those which the execution
of the arbhraLdecision would bave granted him (21
) "·
A.uthoritative comlllentators, as well, bave consistently recogriized that an award of damages
should compenljlate for all }O$$eS or injury caused by a State' s wrongful acts. As Garcia-Amador
explains: · ·
« While restitution merely restores the property or right of which the alien in question has
been deprived, an indemnity· is intended to compensate him for all the other consequences
ofthe act or omission contrary to international Iaw .... Por ali these reason [sic], 'damages'
are, in fact, the only form of reparation which makes it possible in ali situations to abide
by the principle ... that ' full ' reparation must be made for an injury caused by an act or
omission contrary to international law (22) ».
All damages are compensable, provided only that they are proximately caused by the
injurious acts. According to Reuter, « The injury for which reparation is due is that which is
tied by a chain of causality to the wrongful act (23
) "· As Yntema explains:
«(A) Whenever an internatìonalliability arises, there is a duty to make complete compensation
and therefore for ali the prejudicial consequences of the occurrence giving rise to
the liability, whether the damage thus ensuing is direct or indirect .. (B) The only Iimitations
upon this duty spring from evidential or equitable considerations: (1) The damage must
be shown to be a. consequence of the occurrence. (2) I t must be reasonably capable of
estimation. (3) The compensation must be reasonably adjusted to the particular circumstances
of the individuai case (24) n.
In the present case, full reparation cannot be achieved through restitutio in integrum. The
positions of the parties bave changed so dramatically that restoration of the state of facts that
existed prior to the Government of ltaly's wrongful intervention is simply not possible.
Accordingly, the Government of Italy should pay compensation in the full amount of the losses
sustained by Raytheon and Machlett as a result of its wrongful conduct, as detailed below.
(2°) Case of Antoine Fabiani, summarized in WHITEMAN, op. cit., at pp. 1785-1789.
(21) Ibid. at pp. 1787-1788. In discussing the Fabiani case, Freeman noted that « the generai result of the case
appears, in the large, to be not inconsistent with the view expressed by the World Cottrt [in the Chorzow Factory
case] to the effect that the State's duty of reparation is one of a restitutio naturalis, that is to say, the re-establishment
of the situation which in al! likelihood would have existed if the delict had not been ccitninitted >>.
FREEMAN, op. cit., at pp. 580:...581.
( 22) GARcfA-AMADOR, op. cit., at p. 584. See also, D. P. O'CONNELL, 2 International Law, p. 1204 .(1965);
ScHWARZENBERGER, op.cit., at pp. 654 and 6ss; EAGLETON, op.cit., at p. 182; ÙLIVER, «Lega! Remedies and Sanctions
»,in International Law of State Responsibility for Injuries to Aliens, p. 61 at p. 710 (R. Lillich, ed. and contrib.
1983); FREEMAN, op. cit., at p. 576; proposed draft Art. 6 of the International Law Commission's Draft Articles on
State Responsibility, Il Yearbook of the International Law Commission, I984 (Part Two), p. roo, N. 322.
(23) Translation. P. REUTER, Droit internationt;~l public, p. z66 (1958). As Professar Reuter notes, the use
of the terms « direct » and <t indirect >> is a <t vague » and <t insufficient >> means of attempting to distinguish between
consequences which are and are not so directly re!ated to the wrongful act as to be compensable. Ibid.
(24) H. E. YNTEMA, « The Treaties With Germany and Compensation for War Damage >>, 24·Columbia Lazv
Review, p. 153 (1924). See also, e.g., }IMÉNEZ DE ARÉCHAc;A, « International Responsibility >>, in Manual of Public
International Law, p. 531 at pp. 56g,...569 (M. Sorenson,. ed. 1968); C. EAGLRTON, « Measure of .Damages in International
Law », 39 Yale Law }ourrral p. 52 at p. 75 (1929) ..
60 RASSEGNA DELL'AVVOCATURA DELLO STATO
2. - The Specific Types of Injury
(a) Financial Losses with Respect to Loan Guarantee Payments, Return of Investment, and Open
Accòunts.
As shown above, a principal objective of the requisition was to prevent Raytheon and
Machlett from disposing of ELSI's assets through the planned liquidation. The Government
of ltaly wanted to acquire the assets itself and was not prepared to pay for them as of 1 April
1968. The requisition met the immediate political need of responding to the local outcry
against the plant's closing, while giving the Government of Italy the opportunity to plan its
acquisition strategy. Given ELSI's financial condition, the direct and foreseeable consequence
of the requisition order was ELSI's bankruptcy. Even the President of the Sicilian Region
acknowledged that ELSI was then left with no alternative but to file for bankruptcy.
Having caused ELSI to declare bankruptcy when it would otherwise have proceeded to
liquidate its assets and seek settlements with its creditors, the Italian Government is responsible
for losses incurred by ELSI's owners as a result of the involuntary change in the manner of
disposing of ELSI's assets.
The bankruptcy realized much less from the sale of ELSI's assets than would have been
received from an orderly liquidation. As shown in the following table, the proceeds from an
TABLE
LIQUIDATION VS. BANKRUPTCY PROCEEDS (l)
PROCEEDES FOR DISTRIBUTION ....
Payment of Creditors:
Preferred ................... .
Secured ................... .
Unsecured - Raytheon
Unsecured - Other ......... .
ToTAL ..................... .
Administration and Liquidation
Costs ..................... .
TOTAL PAYMENTS ........... .
NET PROCEEDS ............... .
(Lire in Millions)
Liquidation
at Book
Value
17,053·5
1,036.8
3,819·5
1,143·8
10,292·4
16,292·5
370.0
16,662.5
391.0
NET PROCEEDS (Cost) to Raytheon and Machlett:
Net Proceeds ............... .
Guaranteed Loans/Interest ... .
Open Accounts ............. .
ToTAL (million lire) ......... .
TOTAL (U.S. dollars)
391.0
-o-
-o-
391.0
$625,6oo (2
)
Liquidation at
Estimated Min.
Value
10,838.8
1,036.8
3,819·5
510.8
5,10!.7
370.0
10,838.8
-o-
-o(
3,16o.6)
( 633.0)
(3,793.6)
($6,o82,6oo) (3)
Actual
Bankruptcy
Proceeds
6,373·8
1,964·7
3,702.1
-o-
33·4
5,700.2
673.6
6,373·8
-o-
-o-
(5,787.6)
(1,143.8)
(6,93!.4)
($II,II3,6oo) (4)
(l) Data taken from Annex 13, Schedules E, F, and Ix and Annex 30, Attachment B, except conversion
from lire to dollars, as noted belo w.
(2) Conversion given at Annex. 13, Schedule G4.
(3) Conversion given at Annex·x3,.Schedule 12 (guaranteed loans and interest) and Schedule J (open accounts.)
(4) Conversion given at Annex 13, Schedule xx (guaranteed loans and interest) and Schedule J (open accounts.)
MEMORIA DEL GOVERNO U.S.A. 61
orderly liquidation of ELSI's assets at book value (as a fair measure of their going concern value)
would have been sufficieht to pay off all of ELSI's creditors, including amounts owed to Raytheon
on open accounts, and still return 391 million lire (US$625,6oo) to Raytheon and Machlett as
a small return of theìr investinent. Even had the liquìdation realized no more than the estimateci
minimum liquidati<> n · value, Ra:ytheoh would have received some payment o n open accounts
and a significant portion of ELSI's guaranteed loans would have been paid from the proceeds
ofELSI's assets. lnstea:d, under the bankruptcy, Raytheon lost the full value of the open accounts
and, more importantly, was required to pay ali of the guaranteed loans, thus incurring some
6,93!.4 millior:i lire (US$II,Iij,6oo) in additional losses. The resulting damage to Raytheon
andi Machlett, therefore, as compared with liquidation at going concern value, is 7,322.4 million
lire (US$xi,739,200).
Raytheon and Machlett incurred these losses as a result of the Government of Italy's
wrongful intervention. The losses resulted directly from the Government of Italy's actions
in violation of the Treaty, and therefore should be included in calculating the compensation
due the United States for such violations (2 5).
It should be noted that the Treaty explicitly recognizes as a protected « investment » not
only di:rect contributions to capitai but also related fìnancial contributions such as guarantees
àrtd adva:nces of funds. As Artide I of the Supplement specifies, corporations of either party:
« shall not be subjected .to arbitrary or discriminatory measures ... resulting particularly
in ... impairing their other legally acquired rights and interests in such enterprises or in
the investm!mts which they have made, whether in the form of funds (loans, shares or
otherwise), niaterials., equipment, services, processes, patents, techniques, or otherwise >>.
Thus, the guarantees and the open accounts, as well as the direct return of capitai which
Raytheon and Machlett lost, are protected interests - being an « investment » which was made
« iii the form of loans, funds, or otherwise , - and must be considered in awarding compensation
for violation of the Treaty (26).
(b) Legal Expenses in Connection with Bankruptcy and Dejense Against Italian Bank Suits
A further direct consequence of the Government of Italy's actions in violation of the Treaty
was that Raytheon incurred substantial. outside legal expenses in connection with the bankruptcy
and in defending against suits brought in Italian courts by certain government-owned
and government-controlled ereditar banks. As discussed above, in the aftermath of the requisition
and bankruptcy of ELSI, five Italian government banks brought suit against Raytheon
(25) In accordance with the basic principle that compensation should seek to restore the situation wbicb would
bave existed without tbe wrongful act, compensation should be awarded in United States dollars. See, e.g.,
Morrison-Knudsen Pacific, Ltd. v. Ministry of Roads and Transportation, 143-127-3 (24 July 1984) at p. 35; Craig
v. Ministry of Energy of Iran, Awd. N. 71-346-3 (2 Sep. 1983) at pp. 17-18. Raytbeon and Macblett are United
States companies, wbose principal business currency is dollars. Raytheon's loan guarantee payments were met
by purcbasing lire with dollars, as were its legai expenses in defending tbe creditor claims and other costs. The
losses were thus incurred in dollars. Moreover, in view of the changing currency values since tbe time of loss, only
if compensation is calculated in dollars can it accurately reflect the actuallosses witbout distortion caused by subsequent
monetary fluctuations.
By the same token, compensation for tbe portion of open accounts owed to Raytheon whicb it was precluded
from recovering sbould be measured in dollars, converted at the official rate of exchange in effect at tbe time. Had
any of th.ese payments been. received, they would bave been promptly converted to dollars and repatriated. The
loss was suffered and should now be measured in dollars.
(26) Similar losses bave been recognized in arbitrai awards in tbe absence of a treaty. For example, in the
Cerruti case, whicb arose wben Colombia seized the assets of an Italian national and those of a company in wbich
he was a partner, tbe arbitrator required Colombia to assume the outstanding debts of the partnership for which
Cerruti could be held personally liable. Case of Cerruti, summarized in MooRE, op. cit., vol. 2, at pp. 2117 et seq.
The arbitrator in effect acted to prevent the passing-on to the investor of company debts, such as the guarantees
ip. the present case.
In the Shufeldt case, which concerned the breach of a concession agreement with Guatemala, Guatemala
was found liable for, inter alia, reimbursement to the concessionaire of amounts advanced to his laborers which
were uncollected at the time of breach. Shufeldt Claim, 2 Reports of International Arbitrai Awards, pp. 1083 et seq.
62 RASSEGNA DELL'AVVOCATURA DELLO STATO
for payment of certain of ELSI's debts which Raytheon had not guaranteed. Italian courts
subsequently dismissed ali of the lawsuits as groundless, but only after severa! years of litigation.
These lawsuits would not have been filed had ELSI been able to liquidate in an orderlymanner,
since the banks would have been paid in full or, at worst, would have settled their debts with
ELSI. The evidence indicates, moreover, that these suits were not only a foreseeable consequence
of the Government's actions, but part of its plan to shift the costs of its actions to
Raytheon. The President of the Sicilian Region had advised Raytheon even before the requisition
that such suits would be brought (27).
As detailed in Annex 40 and Annex 13, Schedule K, Raytheon incurred US$us,638·35
of outside legal expenses in connection with the bankruptcy and US$766,936.77 in defending
against these lawsuits. As part of the foreseeable consequential damages stemming from ltaly's
wrongful intervention in ELSI, these amounts should be included in the compensation to be
awarded (28).
(c) Costs Incurred by Raytheon In Pursuing Its Claim.
As also detailed in Annex 40 and Annex 13, Schedule K, Raytheon incurred outside legal
and related expenses of some US$57,226.38 in pursuing its claim against the Government of
Italy for its actions against ELSI. Therefore, compensation in this case should include this
amount, for such costs are a loss which would not have occurred but for Italy's wrongful conduct.
lnternational arbitrai tribunals frequently have allowed recovery for the costs incurred
in seeking international reparation. In the Salvador Commerciai Company case, for example,
the award included amounts which the claimant had expended both prior to the intervention
of the United States on his behalf and after United States' espousal of the claim (29). Similarly,
in the Shufeldt case, the arbitrator awarded the claimant the expenses it had incurred in trying
to come to a settlement with the Guatemalan Government (3°). In the Poggioli case, the award
included compensation for the claimant's travel expenses in submitting the claim to the legation
and the Venezuelan Government (3 1).
Thus the full amount of damages suffered by Raytheon and Machlett is US$625,6oo for
loss of investment, US$II,739,200 for losses resulting from open accounts and payment of
guaranteed loans, and US$939,800 for legal expenses incurred by Raytheon in relation to bankruptcy
proceedings, in defending against related litigation, and in pursuing its claims, for a
total of US$I2,679,ooo, plus interest, computed as described below.
SECTION 3·- The Award of Interest.
A) Interest should be awarded to compensate for the loss of USE of money over time.
The principle that compensation should redress the injuries caused by the respondent's
wrongful actions entails, as a corollary, that interest be awarded to compensate for the loss of
use of money over time.
(27) Supra, pp. IJ-·I4.
(28) In the Case of Cerruti, op. cit., in order to preserve the full amount of compensation for the property
taken, the Government of Colombia was required to pay litigation costs incurred by Cerruti in defending against
private creditors seeking to recover from him personally debts of the company whose assets had been seized.
The arbitrator noted that Colombia had <<by its acts destroyed [Cerruti's] means for liquidating [company] debts ...
for which he may be held personally liable >>. Ibid., at p. 2121. Similarly in this case, to ensure full recovery
by Raytheon of amounts owed for the unlawful taking of its property, it too should be reimbursed for litigation
costs which resulted from the taking. The creditors that brought suit, moreover, were Italian government banks,
acting pursuant to a government pianto increase Raytheon's losses from its ELSI operation to the maximum extent
possible. These losses were much more directly the consequence of wrongful government action than those which
Colombia was required to assume in Cerruti.
(29) Claim of << Salvador Commerciai Company » et al., rs Reports of International Arbitrai Awards, p. 467
at p. 469.
(30) 2 Reports of International Arbitrai Awards, p. uor.
(31) ro Reports of International Arbitrai Awards, p. 669 at p. 69r.
MEMORIA DEL GOVERNO U.S.A. 63
International law commentators agree that just compensation to an injured party requires
the payment of interest on its loss, as «a necessary part of a just national indemnification (32) "·
Lillich states « [i]nterest as part of an award by an international tribuna! ... is recognized by
customary international law ... as an element of damages inherent in just compensation (33) "·
Similarly, Eagleton notes that « [t]he award of interest is usually considered to be merely a part
of the duty to make full reparation (34
) "·
lnternational tribunals and commissions have long viewed interest as a vita! element of
compensation. In The Russian Indemnity Case, for example, the Permanent Court of Arbitration
state d that:
« all interest-damages are always reparation, compensation for culpability .... Legai interest
allowed a creditor for a sum of money .. . is the le gal compensation for the delinquency
of a tardy debtor exactly as interest-damages or interest allowed in the case of ... the nonfulfillment
of an obligation, are compensation ... (35) >>.
The Permanent Court of International Justice awarded interest in 1923 in the Wimbledon
case (36) and further expressed agreement with the proposition that compensation for a taking
must include interest in the Chorzow Factory case (3'). Similarly, in the Illinois Centrai Railroad
Company, the Mexican-United States Claims Commission held that interest « must be regarded
as a proper element of compensation (38) >>,
More contemporary cases consistently reaffirm this principle. In 1962, for example, the
Foreign Claims Settlement Commission of the United States, citing the opinions of mixed
clairns commissions and views of authoritative commentators, concluded that an award of interest
« is not only in conformity with principles of international law ... but is also required by equity
and justice ... (39) "· The Iran-United States Claims Tribuna! also has ruled consistently that
principles of international law entitle a successful claimant to interest. As stated in the leading
Tribuna! award in McCollough fsJ Company, Inc. v. The Ministry oj Post, Telegraph and Telephone
et al.:
« The first principle [which can be deduced from international practice] is that under norma!
circumstances, and especially iri commerciai cases, interest is allocated on the amounts
awarded as damages in order to compensate for the delay with which the payment to the
successful party is made (40) >>,
(32) J. B. MooRE, 6 Digest of International Law, p. I029 (I9o6), quoting J. D. Davis, Treaty Notes, in United
States Treaty Volume (x776-I887).
(33) R. LILLICH, « Interest in the Law of International Claims >>, Essays in Honor of Voitto Saario and Toivo
Sainio, p. SI at p. 59 (I983).
(34) C. EAGLETON, The Responsibility of States in International Law, p. 203 (I 928). See genemlly, J. H. RALSTON,
The Law and Procedure of International Tribunals, pp. I27-I36 (I92S); M. WHITEMAN, op. cit., pp. I9I3 et seq.
(I943); LILLICH, op.cit., at pp. SI-59; G. WETTER, « Interest as an Element of Damages in the Arbitrai Process •>,
5 International Financial Law Review, pp. 20 et seq. (Dee. 1986); Artide 38(x) of the Revised Harvard Draft Convention,
F. V. GARCIA-AMADOR, L. SoHN and R. BAXTER, Recent Codification of the Law of State Responsibility
for Injuries to Aliens, p. 341 (1974).
(35) The Russian Indemnity Case (I9I2), I Hague Court Reporter, p. 297 at p. 3I3, Perm Ct. Arb. (I9I6),
reprinted in 7 American journal of International Law, p. I78 at p. I9I (I9I3)· In this case, however, the Court
found that Russia had waived its claim to interest, I Hague Court Reporter, p. 323.
(36) S.S.« Wimbledon », judgments, I923, P.C.I.j., Series A, N. I, p. IS at p. 33· In this case, the Permanent
Court awarded interest from the date of award on the ground that this was << the moment when the amount of the
sum due has been fixed and the obligation to pay established >>. Ibid.
(37) In Chorzow Factory, Merits, the Permanent Court viewed the reparation of the value of the property
taken plus interest as the minimum to which a claimant deprived of its property is entitled. Op. cit., at p. 47·
As discussed below, in this case the Court found that just compensation would include other damages as well,
since the expropriation was contrary to international law.
( 38) Illinois Centrai Railroad Co. (USA) v. United Mexican States, 4 Reports of International Arbitrai Awards,
p. I34 at p. I37·
(39) In the Matter of the Claim of john Hedio Proach, Decision N. P0-652, Foreign Claims Settlement Commission
of the United States, Decisions and Annotations, p. 549, at p. 552 (I968). See also, e.g., cases cited at N. 58,
infra.
(40) Award N. 225-89-3 (22 Apr. I986), pp. 37-38. See also, e.g., cases cited at N. 59 and N. 6I, infra
64 RASSEGNA DELL'AVVOCATURA DELLO STATO
The United States accordingly submits that interest should be awarded in this case in full
compensation for Raytheon's loss of use of money over time as a result of Italy's actions in
violation of the Treaty.
B). - Interest should be awarded at the United States prime rate.
As shown in the preceding section, the purpose behind an award of interest is to compensate
a claimant for the loss of use of its money from the date of the injury and to thereby make the
claimant whole. The rate chosen therefore should be that which, as nearly as possible, equals
the amount of the claimant's actuallosses. "The rate of interest is determined according to the
circumstances, the object being to determine a just compensation for the wrong (41
) >l. Or, as
D. P. O'Connell suggested, the proper inquiry should be:" [W]hat could the claimant reasonably
have expected had he had the use of the property (42)? )),
This approach has led international tribunals to the choice of different specific rates of
interest in different cases. Among the various rates of interest employed have been: the interest
rate prevailing in the country of the claimant's residence (43), a fair rate in light of prevailing world
financial conditions (44), and that prevailing at the piace where the claim arose (45
). In choosing
the appropriate financial market and interest rate, international commissions have been guided
by the essential purpose of an award of interest - to fairly compensate the injured party for
the loss of use of its money (46).
The principle of full compensation generally dictates, in commerciai cases, the choice of
a commercially reasonable rate of interest which fairly compensates for the loss of use of funds.
As stated by Lillich, " Since the purpose of interest is to provide just compensation to claimants,
the rate of interest must reflect the economie realities of the times (47
) )), This conclusion is not
new. In the Wimbledon case, for example, the Permanent Court took into account" the present
financial situation of the world >>, especially including " the conditions prevailing for public
loans )) in choosing a rate of interest (48).
In more recent times, with domestic interest rates on occasion reaching all-time highs,
the practice of international tribunals reflects more particular emphasis on and consistent appli~
cation of this principle. As noted by the lran-United States Claims Tribuna!, " The international
awards which do not allocate interest or which fix very low rates are rather dated or concern
non-commerciai disputes between governments (49
) >>.
Contemporary international practice does not offer detailed guidance on which particular
" commercially reasonable rate >> should be chosen to reflect fairly the financial injury caused
by the loss of use of money over time (50
). Where an actual rate of loss is claimed, for example,
(41) EAGLETON, op. cit., at p. 205.
(42) O'CONNELL, op. cit., at p. 1213.
(43) See, e.g., S.S. Wimbledon, op. cit., at p. 32.
(44) See, e.g., The << Macedonian >> (United States of America v. Chile), J. B. MooRE, 2 History and Digest of
International Arbitrations, p. 1466 (1898).
(45) See, e.g., Puerto Cabello and Valencia Railway Company Case, 9 Reports of International Arbitrai Awards,
p. 510 at pp. 526-527; BoRCHARD, op. cit., at pp. 429-430. In older expropriation cases, and in contract disputes
which are decided according to lex loci contractus, a local statutory rate of interest frequently has been chosen
See, e.g., LILLICH, op. cit., at p. 58.
(46) See, e.g., }. H. RALSTON, International Arbitrai Law and Procedure, pp. 127-136 and cases cited therein.
(47) LILLICH, op. cit., at p. 56.
(48) S.S. Wimbledon, op. cit., at p. 32·
(49) McCollough & Company, !ne. v. The Ministry of Post, Telegraph and Telephone et al., Awd. N. 225-89-3,
P· 35 (22 Apr. 1986).
(50) See, e.g., the survey of recent international private arbitral awards in 111cCollough, op. cit., at pp. 35-37.
The Chamber in McCollough concludes that the circumstances which may be taken into consideration are
<• unlimited >>. Ibid., at p. 38. This case, however, takes an unusually broad view of << relevant factors >>, including
arbitrator << discretion »; i t may be questioned whether including such factors does not amount to a decision ex
aequo et bono rather than in accordance with principles of law. I t should be noted as well that McCollough considers
cases which are determined under contractual provisions or lex loci contractus rather than international law. The
recent cases cited in McCollough in which the choice of a rate of interest is not decided under national law, with
the exception of the Revere case, award interest at commercially reasonable rates ranging from 9 to I 8 %. In
MEMORIA DEL GOVERNO U.S.A. 65
that the claimant was forced to borrow money a t a specifìc rate, that rate may be used (0l), Where
an<< actual » rate ìs not sought or awarded, however, one of two approaches is generally taken.
Eìther a prevailing standard fìnancial rate may be chosen, selected in light of the fìnancial context
and drcumstances of theinjured party, or a rate which is judgedto be generallyreasonable,
or << fain; !or cofumercial :transactions may be chosen (52). In Syh1ania, the Iran-United States
Cl~ms il'ripl,lnal deddf)d thatinjtlry to Un:iteg. States corporations, as a generai rule, was most
{ajrly mea§:U,tf)<i. by ~t. Vn~ted States. marl.iet. rate. (53
).
In this case, the United States submits that the United States average annual prime .rate
should be tised (54). The injury bere consists of United States dollar losses incurred by Raytheon,
a United States company. Had it not been for the wrongful intervention of the Government
o.t Italy w hl eh is the · àubject of this · claitn; · Raytheon would have retained ·in the U nited States
some U$$9·3. million which it spent to pay ELSI's glJ.aranteed loans and some US$ 94o,ooo
V.:ll!chit spèl'lt for legiù expenses. I11 addition, it wotild have been able to repatriate some
US$~.5 mi111on ·!or all1oun:ts. dlJ.e on. open accounts an d surplus . proceeds of liquidation. The
relevant fìnancial market for measuring the loss is thus that faced by Raytheon in the United
States.. .'J'he prill1e rate, which is «the interest rate ~harged for the very best credi t of short
term.tna:titJ:Ìt)f (55)>çd:sthe rate used [by United States banksJ àS a base to detèrmine rates on
Ioans Jo [d:>,eirl most credhworthycustomers » at any give:ii point in time (56). The prime rate
~hu,s re:llect~ :the minimun1 c(>st ofmoney to Raytheon in the United, States market(57
). The
average prirne rate over the relevant period was approximately IO per cent .. I t is a (( fair rate))
which is consistent with both generai approaches to the choice of an interest rate, whe~ea specìfìc
« actual » rate is l'lot . claimed.
Benvenuti, cqmmercial rates are chosen even though the decision nominally is governed by local law. In the
Revere case, the Tribuna! found that the applicable arbitration rules precluded an award of interest, except for nonpayment
of the arbitration award •• · See; AMINOIL 'IJ, K.uwait, op. cit., · at p. 104~; Benvenuti et Bonfant s.r.l. v.
The Gcvernment of the People's Republic of tbe pongp.(« Benvenuti v. Congo>>), 21 International Legai Materials,
p. 740, at p. 762 (r982); Norwegian Agent v. Belgian Shipowner, 8 Yearbook o/Commerciai Arbitration, p. 94 (1983);
Revere Copper and Brass, I ne. v. Overseas Private Investment Corporation, 17 lnternational· Legai Materials, p. 1321
at p. 1367 (1978); Saudi Arabian Hotel Company v. lnsurance Company of a European Country, ro Yearbook of
Commerciai Arbitration, p. 41 (1985); St.ellar Chartering f.§J Brokerage, ]ne. Time-Chartered. Qwners of the M/V
Co,ntinerlial Trader (USA) v •. Rijn, Maas en Zeé SCheepvaartkantoor, Charterers (Netherlands) (<< Stellar v. Rijn,
Maa$ en Zee »), 7 Yearbook of Commerciai Arbitration; p. 147 at p. 149 (1982). ·
(61) See, e. g., Dames f.§J •Moore v. The lslamic Republic of Iran, Awd. N. 97-54-3, 4lran-United States Claims
Tribuna/; Reports, P• 212 (1983-lii); WETTER, op. cit>
. (52) The Iran-United $tates Claims Trib.unal, faced with a large number of simi!ar cases, generally ordered
simply a« fair·rate >> of ro-12 %. This may be a<< fair rate» for the specific èase or a unifori:n « fair rate». See
also, e.g., Saudi Arabian Hotel Company v. lnsurance Company of a European Country, op. cit.; Norwegian Agent
v. Belgian Shipowner, op. cit.; Benvenuti v. Congo, op. cit. These rates were presumably chosen by the panels in
light of specific relevant t:ates. . . . ...
(53) Sylvania Technical Systeins, lnc. v. The Governinént of the lslamic Republic of Han (« Sylvania >>), Awd
N; r8o-64-1 {27 June 1'985). See also, e.g., LII,LICH, op. cit., at p. 59; AGIP, op. cit.; Stellar v; Rijn; Maas en
Zee, op. cit. In Sylvania, the Chainber chose an investment rate - average rates of interest paid ·on six-month
certificates of deposit - rather than a borr6wing rate because it decided to formulate a uniform rule which could
fairly reflect injury in al! cases; lbid., at pp. 3 I-34· See discussion in WETTER, op. cit., at p. 21.
(54) The actual prime rate changes from time to time during any given year, making calculations over a number
of years éxtremely cumbersome. Thé yearly average prime rate is therefore suggested as a more convenient and
fairly equivalent measurefor interestover longer periods of time. This is given in Annex 96, which was obtained
from the United States Federa! Resetve System Board of Governors.
{56) G. MUNN, Encyclopedia of Banking and Finance, p. 778 {8th ed. by F. L. Garcia 1983).
(66) Sylvania, op. cit., at p. 32, N. 6.
{07) As noted at N. 53 supra, in some cases international tribunals have used an investment rather than a
borrowing rate. However, unless a specific investment loss is claimed, i t is more difficult to choose an appropriate
investment rate. The rates of return on investments vary widely, from the low rates paid on bank savings accounts
to the very high rates possible from successful aggressive investments. Since Raytheon, like most major corporations,
relies significantly on borrowing for its financing, a standardized borrowing rate is both an appropriate and a more
reliable measure in this case.
66 RASSEGNA DELL'AVVOCATURA DELLO STATO
C). - Interest should be calculated from the date of injury to the date of payment of the award,
and compounded annually.
It is generally accepted that interest should be calculated from the date of injury until the
date of payment of the award (58). This follows from the principle that interest is paid in order
to compensate the injured party for the loss of use of its money. The date of injury is determined
in light of what would have occurred, absent the wrongful actions causing the injury. Thus,
with respect to Raytheon's losses for guarantee payments and other actual payments, the date
of injury is the date of payment. With respect to losses on open accounts, i t is the date on which
Raytheon would have received payment on these open accounts if it had been allowed to proceed
with the liquidation pian. For the sake of simplicity, however, the date of injury which has
been used for purposes of calculating interest is the end of the calendar year in which the injury
occurred (59).
By application of the same principle - that interest should compensate for the loss of use
of money - interest should be compounded on an annual basis. While compound interest
has not been uniformly sought or awarded, in a commerciai dispute such as this one it is unquestionably
part of a commercially reasonable rate. As stated in the Fabiani case:
" One has to recognize that Fabiani could have invested in his enterprises, in an interest
bearing way, the simple interest on the amounts of money that had been allocateci in the
arbitrai award, .... The compounding of interest is authorized in the field of current accounts
and of similar operations since the legislator presumes that in commerce money does not
remain unproductive (6") ».
In the AMINOIL case, interest was also awarded on a compound basis (61).
Commentators reaffirm that compound interest should be awarded where appropriate
to compensate for actual loss. As F. A. Mann has recently stated:
" Is it open to the court to hold the plaintiff entitled to compound interest in respect of
damages awarded to him ? In theory the answer should once again be in the affirmative (62) ».
W etter adds :
" It is submitted that the issue as to whether or not compound interest is permissible as
an element of damages must be resolved with reference to the ultimate legai rationale for
awarding interest (63) ».
The United States accordingly submits that the award of compound interest is appropriate
in this case. Raytheon itself is a business enterprise that was generating earnings. Moreover,
Raytheon, like most major corporations, relies significantly on debt financing. If Raytheon
had not suffered financiallosses as a result of Italy's wrongful actions, these funds would either
have generated additional earnings or would have been used to repay debt. These funds therefore
(5 ~) See, e.g. AGIP, op. cit., at p. 343; Delagoa Bay and East African Railway Company in LA FoNTAINE,
Pasicrisie lnternationale, p. 544 (1902); Katherine A. MacMurdo Case, ibid., at p. 397· An excellent collection of
earlier State practice is found in WHITEMAN, op.cit., at pp. 1963-1975. See also, e.g., EAGLETON, op.cit., at p. 205;
LILLICH, op. cit., at pp. 55-57. Some earlier decisions by international tribunals included interest only unti! the
date of the award on the theory that it had no authority to allow interest for a period of time beyotJ.d that of its
existence. See RALSTON, op.cit., at p. 87, sec. 170. As the lnternational Court of Justice is a permanent body,
however, an award of interest unti! the date the award is paid would not be an act beyond the power of the Court.
See, e.g., S.S. Wimbledon, op. cit. The lran-United States Claims Tribuna! has also routinely awarded interest
up to the date of payment. See, e.g., Sylvania, op. cit., at p. 34; Woodward-Clyde Consultants v. The Government
of the Republic of Iran, et al., Awd. N. 73-67-3, 3 Iran-United States Claims Tribuna[ Reports, p. 239 at p. 251
(1983-II).
( 59) Annex 13, Schedules Gz and Hz.
(60) Translation. Antoine Fabiani, op. cit., at p. 183.
(6 1) AMINOIL v. Kuwait, op. cit.
( 62) A. MANN, << On lnterest, Compound Interest and Damages >>, 101 The Law Quarterly Review, p. 30
at p. 44 (1985).
(63) WETTER, op. cit., at p. 72.
MEMORIA DEL GOVERNO U.S.A. 67
would bave generated eitber interest earnings or interest savings, whicb in turn would bave been
devoted to a profitable use. Tbe calculation of interest must tberefore be compounded in order
to reflect tbe extent of actual injury from tbeir loss.
In conclusion, in order to provide compensation wbicb reflects tbe extent of injury caused,
tbe United States submits tbat tbe Court sbould award interest at tbe average annual United
States prime rate, compounded annually, from tbe date of tbe injury to tbe date compensation
is paid.
SUBMISSIONS
Accordingly, the United States submits to the Court that it is entitled to a declaration and
judgment that:
(a) Italy - by engaging in the acts and omissions described above, which prevented Raytheon
and Machlett, United States corporations, from liquidating the assets of their whollyowned
Italian corporation ELSI and caused the latter's bankruptcy, and by its subsequent actions
and omissions - violated the international legai obligations which it undertook by the
Treaty of Friendship, Commerce and Navigation between the two countries, and the Supplement
thereto, and in particular, violated:
- Artide III(2), in that Italy's actions and omissions prevented Raytheon and Machlett
from exercising their right to manage and control an Italian corporation;
- Artide V (r) and (3), in that Italy's actions and omissions constituted a failure to provide
the full protection and security as required by the Treaty and by international law;
- Artide V (2), in that Italy's actions and omissions constituted a taking of Raytheon's and
Machlett's interests in property without just compensation and due process of law;
- Artide VII, in that these actions and omissions denied Raytheon and Machlett the right
to dispose of their interests in immovable property on terms no less favorable than an Italian
corporation would enjoy on a reciproca! basis;
- Artide I of the Supplement, in that the treatment afforded Raytheon and Machlett was
both arbitrary and discriminatory, prevented their effective control and management of ELSI,
and also impaired their other legally acquired rights and interescs;
(b) that, owing to these violations of the Treaty and Supplement, singly and in combination,
the United States is entitled to compensation in an amount equal to the full amount of the damage
suffered by Raytheon and Machlett as a consequence, induding their losses on investment,
guaranteed loans, and open accounts, the legai expenses incurred by Raytheon in connection
with the bankruptcy, in defending against related litigation and in pursuing its daim, and interest
on such amounts computed at the United States prime rate from the date of loss to the
date of payment of the award, compunded on an annual basis; an d
(c) that Italy accordingly should pay to the United States the amount of US$ r2,679,ooo,
plus interest, computed as described above.
ABRAHAM D. SOFAER
Agent of the United States of America
ARNOLD I. BuRNs
Deputy Attorney General
Department of ] ustice
TABLE OF ANNEXES
I. - Treaty of Friendship, Cornmerce and Navigation between the United States of America
and the Italian Republic, signed at Rome, 2 February I948, entered into force, 26 July
I949· T.I.A.S. I965; 79 UNTS I7I.
2. - Agreement Supplementing the Treaty of Friendship, Commerce and Navigation of 2
February I948, signed at Washington, 26 September 1951, entered into force, 2 March
I961. T.I.A.S. 4685; 404 UNTS 326.
3· - Chamber of Deputies, Parliamentary Proceedings, Documents - Bills and Reports, N.
246-A, page 4, Presented to the Office of the President on 2 March I949·
4· - Senate of the Republic, Legislature III, 29Ist Session, Assembly, page 13758, I9 July
1960.
5· - Map of Italy, highlighting the Mezzogiorno Region.
6. - The Foreign Investor's Digest of Italian Corporate Law, pages 245-254 (I963).
7· - Raytheon Company Certificate of Good Standing, State of Delaware, dated 22 December
I986.
8. Introductory pages from I985 Raytheon Company Annual Report.
9· - Affidavit of Charles F. Adams, Finance Cornmittee Chairman and Director, Raytheon
Company, dated I7 April 1987.
I o. - Manufacturing an d Sales Agreement between Raytheon Manufacturing Company an d
Fabbrica Italiana Raddrizzatori Apparecchi Radiologici, dated I8 July I952.
II. - Letter of Participation from Raytheon Manufacturing Company to Elettronica Sicula,
S.p.A., dated 21 October I955, revised I5 March I956.
12. - Selected United States Dollar-Italian Lire Conversion Rates from The Wall Street]ournal
(for dates 29 March I968, 19 April 1968, 29 April 1968, 30 }une I97I) and The Washington
Post (for dates I April I968, I I July 1969, 24 January I974).
I3. - Affidavit of Arthur Schene, former Vice President-Controller of Raytheon Company,
dated I7 April 1987.
I4. - Affidavit of Herbert Deithcher, Vice President and Treasurer, Raytheon Company, dated
6 January I987.
I5. - Affidavit of }ohn D. Clare, former Chairman, Raytheon Europe International Company,
dated IO January I987.
I6. - The Machlett Laboratories, Inc., Certificate of Good Standing, State of Connecticut,
dated 26 December I986.
I7. - Affidavit of }oseph A. Scopelliti, former Chief Financial Officer and Controller, Raytheon
Company, dateci I April 1987.
I8. - «A New Industry in an Ancient Land "• Raytheon:-ELSI S.p.A., Brochure, October
1963.
I9. - Sales brochure, Raytheon-ELSI S.p.A.
20. - Aerial photograph of Elettronica Sicula S.p.A. plant in Palermo, Sicily, 1962.
21. - Affidavit of Rico A. Merluzzo, former Director of Planning, Raytheon-ELSI S.p.A.,
dated 17 April I987.
22. - << Project for the Financing and Reorganisation of the Company "• I967 Report prepared
by Raytheon-ELSI S.p.A.
70 RASSEGNA DELL'AVVOCATURA DELLO STATO
23. - Quarterly Economie Review Annua[ Supplement, The Economist Intelligence Unit (1967).
24. - I.R.I., Istituto per la ricostruzione Industriale, 1967 Annua[ Report, pages 38-39, 65
(1968).
25. - The State As Entrepreneur, (S. Holland ed. 1972), pages 45-49, s6-6o.
26. - Affidavit of Avv. Giuseppe Biscanti, Studio Legale Biscanti, Rome, dated II December
1986.
27. - Affidavit of Joseph Oppenheim, former Chairman of the Board, Raytheon-ELSI S.p.A.,
dated 22 September 1971.
28. - Affidavit of Charles H. Resnick, Generai Counsel, Raytheon Company, dated 8 September
1971.
29. - Affidavit of Avv. Giuseppe Bisconti, Studio Legale Bisconti, Rome, dated 20 August
1971.
30. - Affidavit of Dominic A. Nett, former Controller, Raytheon-ELSI S.p.A., dated 17
Aprii 1987.
31. - Minutes of Raytheon-ELSI S.p.A., Board of Directors Meeting, 16 March 1968.
32. - Minutes of Raytheon-ELSI S.p.A., Shareholders Meeting, 28 March 1968.
33· - Requisition Decree, Mayor of the Municipality of Palermo, I Aprii 1968.
34· - Artide 7 of Law of 20 March x86s, N. 2248, Attachment E.
35· - Presidential Decree of 29 October 1955, N. 6.
36. - Appeal by Raytheon-ELSI S.p.A., to the Prefect of Palermo of Requisition Decree of
the Mayor of Palermo, dated 19 Aprii 1968.
37· - Minutes of Meeting in Palermo between Messrs. Joseph Oppenheim, Howard Hensleigh,
Stanley Hillyer and President Carollo of Sicily, 19/20 Aprii 1968.
38. - Memorandum from the President of the Sicilian Region, 20 Aprii 1968.
39· - Letter from Joseph Oppenheim, Chairman of the Board, Raytheon-ELSI S.p.A., to
Hon. Vincenzo Carollo, President of the Sicilian Region, dated 26 Aprii 1968.
40. - Affidavit of Charles H. Resnick, Generai Counsel, Raytheon Company, dated 19 January
1987.
41. - Artide 217 of the Bankruptcy Law of Italy, Royal Decree of x6 March 1942, N. 267.
42. - Minutes of Meeting of Raytheon-ELSI S.p.A., Board of Directors, 25 Aprii 1968.
43· - Raytheon-ELSI S.p.A., Petition for Bankruptcy to the Civil and Criminal Tribuna! of
Palermo, dated 26 Aprii 1968.
44· - Raytheon-ELSI S.p.A., Judgment of Bankruptcy, Civil and Criminal Tribuna! of Palermo,
decided 7 May 1968, deposited 16 May 1968, registered 27 May 1968.
45· - Documents filed in the Civil and Criminal Tribuna! of Palermo designating Giuseppe
Siracusa Trustee in Bankruptcy and selecting the creditors committee in the bankruptcy
of Raytheon-ELSI, S.p.A., dated 4 June 1968.
46. - Address by Minister of Industry, Commerce, and Crafts Andreotti to the Italian Parliament,
dated 25 July 1968.
47· - Press Release by the Government of Italy, dated 13 November 1968.
48. - Photograph of entrance to Elettronica Sicula S.p.A. plant in Palermo, Sicily, 1962.
49· - Photograph of entrance to Raytheon-ELSI plant in Palermo, Sicily, November 1968.
so. - "I.R.I. Breaks Its Promise- 2oo Workers Remain Jobless », L'Ora, s/6 December 1968.
sr. - Notice of Auction to be held 18 January 1969, Corriere Della Sera, II December 1968.
52. - Minutes of 18 January 1969 Auction of ELSI's Assets.
53· - « CGIL: The Undertakings for ELSI Are Not Being Fulfilled », Giornale di Sicilia,
8 December 1968, page 6.
MEMORIA DEL GOVERNO U.S.A. 71
54· - « ELSI: Agreement reached for Workers "• Giornale di Sicilia, 30 January 1969, page 2.
SS· - « The ' EX' [Employees] of ELSI Protest in Rome "• Giornale di Sicilia, 30 January 1969,
page 5·
56. - « ELSI: Conclusive Meeting in the Prefecture "• Giornale di Sicilia, 19 March 1969, page
14.
57· - Notice of Auction to be held 22 March 1969, The New York Times, 5 March 1969, page
28.
58. - Minutes of 22 March 1969 Auction of ELSI's Assets.
59· - «' There Was an Agreement' Says Carollo "• Giornale di Sicilia, 6 Aprii 1969.
6o. - Minutes of Raytheon-ELSI S.p.A., Creditors Committee Meeting, 29 March 1969·
61. - Submission by Trusteee in Bankruptcy Giuseppe Siracusa to the Civil and Criminal Court
of Palermo, dated 3 Aprii 1969.
62. - Brief to Civil and Criminal Tribuna! of Palermo from Avv. Giuseppe Bisconti, dated 8
Aprii 1969.
63. - Submission to Civil and Criminal Tribuna! of Palermo by Avv. Giuseppe Bisconti, dated
10 Aprii 1969.
64. - Decree of the Civil and Criminal Tribuna! of Palermo, dated 9 May 1969.
6s. - Minutes of Creditors Committee Meeting, Raytheon-ELSI S.p.A., dated 2 May 1969.
66. - Notice of Auction to be held 3 May 1969, The New York Times, 8 Aprii 1969, page 71"
67. - Minutes of 3 May 1969 Auction of ELSI's Assets.
68. - Submission to the Civil Court of Palermo by ELTEL S.p.A., dated 16 Aprii 1969.
69. - Submission to the Civil and Criminal Tribuna! of Palermo by Trustee Giuseppe Siracusa,
dated 3 May 1969, subsequent order by the Tribuna!, dated 5 May 1969.
70. - Submission to the Civil Court of Palermo by EL TEL S.p.A., dated 27 May 1969.
71. - Minutes of Creditors Committee Meeting, Raytheon-ELSI S.p.A., 6 June 1969.
72. - Notice of Auction to be held on 12 July 1969.
73· - Letter from Joseph Oppenheim, Vice President, Raytheon Company, to Industria Elettronica
Telecomunicazioni S.p.A., dated 26 June 1969.
74· - Transcript of Bankruptcy Hearing, Civil and Criminal Court of Palermo, 13 July 1969.
75· - I.R.I., Istituto per la ricostruzione Industriale, 1985 Yearbook, pages 260-264.
76. - Judgment of Prefect of Palermo, dated 22 August 1969.
77. - Council of State Opinion Regarding Appeal by Mayor of Palermo, 19 November 1971.
78. - Ruling by President of Italy Dismissing Appeal by Mayor of Palermo, dated 22 Aprii
1972, registered 19 May 1972.
79· - Lawsuit for damages fiied by the Trustee against the Minister of the Interior and the
Mayor of Palermo, dated 16 June 1970.
So. - Judgment of the Court of Palermo, decided 2 February 1973, filed 29 March 1973, registered
4 Aprii 1973.
81. - Judgment of the Court of Appeals of Palermo, registered 24 January 1974.
82. - Judgment of the Supreme Court of Appeals, dated 26 Aprii 1975.
83. - Certificate of Good Standing, State of Delaware, Raytheon Service Company, dated
22 December 1986.
84. - Proof of Raytheon Company's 100% ownership of Raytheon Service Company, dated
8 October 1986.
85. - Senate of the Republic, Bills and Reports- 1948-1949, N. 344-A, Report of the Majority,
page 2, Sent to the Office of the President on 28 May 1949.
72 RASSEGNA DELL'AVVOCATURA DELLO STATO
86. - Commerciai Treaties: Hearings Before the Special Subcommittee on Commerciai Treaties
and Consular Conventions, Committee on Foreign Relations, United States Senate,
82d Congress, 2d Session (1952).
87. - «Commerciai Treaty Program of the United States », Department of State Publication
6565, Commerciai Policy Series r63 (January 1958).
88. - Letter of the Secretary of State dated 25 January 1952, contained in the Message from the
President of the United States transmitting the Supplementary Agreement, Senate Print
Executive H, 82nd Congress, 2nd Session, page 2.
89. - Senate of the Republic, Parliamentary Proceedings, Legislature III, Bills and Reports
- Documents; 1958-r96o, N. 931-A, page 2, sent to the Office of the President on r8
July 1960.
90. - Chamber of Deputies, Parliamentary Proceedings, Legislature III, Documents- Bills and
Reports, N. 537, page 3, presented to the Office of the President on 8 November 1958.
91. United States Code, Title 5, Sec. 706 (2) (A) (1982).
92. Delaware Code Annotateci, Title 8, Secs. 271, 275 (1983 and Supp. 1986).
93· Connecticut Generai Statute, Annotateci, Secs. 33-372, 33-375 (West 1958 and Supp.
1986).
94· Delaware Code Annotateci, Title ro, Secs. 6ror-6II5 (1975).
95· Italian Criminal Code, Secs. 508, 6r4, 6r5, 633, 634.
96. Table of United States prime rates covering the period from January 1964 to March
I987.
COUNTER - MEMORIAL
SUBMITTED BY ITALY
(CASE CONCERNING ELETTRONICA SICULA S.P.A. - ELSI)
16 NOVEMBER 1987

INTRODUCTION
In the present proceedings the Government of the United States has attempted to show
that the ltalian Government is responsible for a number of violations of internationallaw, particularly
of the provisions contained in the Treaty of Friendship, Commerce and Navigation between
Italy and the United States of 2 February 1948 and the Agreement supplementing the
Treaty of 26 September 1951. lt is daimed that the alleged violations caused damage to two
United States companies, the Raytheon Company and Machlett Laboratoires lnc., on behalf
of whom the Government of the United States has brought the present action.
In answer to the Memoria! submitted by the Government of the United States on 15 May
1987, the Italian Government submits the present Counter-Memorial.
One of the purposes of this Counter-Memorial is to refute the reconstruction of the facts
presented by the Government of the United States (Part l).
This part is followed by some considerations concerning the jurisdiction of the International
Court of Justice (Part Il) and the admissibility of the United States daims (Part III). In Part
III the Italian Government lodges an objection on admissibility, which, in the defendant Government's
view, should lead to the rejection of the daims.
However, the Italian Government, in order not to hinder the rapid administration of international
justice, dedares that it would favour the condusion of an agreement between the parties,
under Artide 79, paragraph 8, of the Rules of Court, that the objection should be heard and
determined within the framework of the merits.
Part IV of the Counter-Memorial deals with points of law relating to the substance of the
allegations made by the Government of the United States. In practice, this consists of the interpretation
of the above-mentioned 1948 Treaty and 1951 Supplementing Agreement and the
problems related to their correct application.
Lastly, Part V of the present Counter-Memorial deals with issues that may be of interest
only in the case of some of the daims made by the Government of the United States being upheld
by the Court. This Part centers around the methods used to calculate the damage suffered
and the evaluation of such damage.
In accordance with Artide 49, paragraph 2, of the Rules of Court, the Counter-Memorial
finally indudes the submissions that the Italian Government respectfully presents to the Court.

PARTI
STATEMENT OF FACTS
x. Necessity to provide an objective account of the facts which are relevant to the case.
The statement of facts contained · in the Memoria! submitted by the Government of the
United States shows a greatmany inaccuracies, gaps and tendentious interpretations. I t is therefore
necé11sary to run over all the relevant circumstances · of the case in order to pro vide a· more
complete ·an d abové an· more·· accurate account.
2. ELSI's problems from I962 to I967 ,· the substantial financial aid given by Italian authorities;
From 1962,. the year in whiel!. ,Raytheon became ELSI's controlling shareholder, ELSI proveci
to be a constant loss-maker, incapable of competing with other companies in the sector. As
a:lso the annéx:es to the claìmant Government's Memoria! show (l); ELSI's accumulateci losses
reached Lire 326;90o,ooo in 1962, Lire 1,228,6oo,ooo in 1963, Lire 284,70o,ooo in 1964, Lire
36t;ooo,ooo in 1965, Lire 2,0o7,ooo,ooo in 1966, and the record figure of Lire 2,681,3oo,ooo
in 1967.
Certainly ELSI's difficu:lties were not due to the fact that it was a foreign-owned company (Il).
ELSl's main coxnpetitors ·in • Italy were in fact also non-Italian corripanies; namely, Philips, a
Dutch company; Siemens, à German company, and Thomas Houston, a French company. The
reason why ELSI continued to lose its market shares was due solely to the fact that the competitors
managed to offer the same or even supetior-quality products a t considerably lovirer prices · (3),
And that is not all. Unlike its non-Italian competitors, ELSI was always able to count on
substantial financial aid from the Italiart Government. Back in 1956, when Raytheon nrst becarne
a shareholder in ELSI, it successfully requested the Sicìlìan Regional Government to take
a 33·3 % stake on the company, and obtained a ten-year Iow-interest loan of Lire 700 million
from the Regional Governmerit through ìts financial company, IRFIS (4). Between 1956 and·
1966, ELSI was granted further low-interest Ioans totalling Lire 6,ooo million, of which Lire
3;500 million were given in the last four years when the coi:npany was wholly controlled• by
Raytheon: (5
). This does not take account of all the other grants of various kinds, such · as the
tax relief for the merger with the former group company, SELIT, in 1965 (6). This shows that
the treatment meted out to ELSI by Italian authorities was anything but discriminatory.
(l) Cf. Memoria! submitted by the United States of America (Case concerning Elettronica. Sicula S.p.a. -
(ELSI)) (hereinafter referred to 11s «·Memoria!&}, Annex 13, Schedule BI.
(2) Contrary to what Raytheon managers claim, according to what is said in the Memoria!, pp. 7-8.
(3) For an explicit admission in this regard on the part of ELSI management, see « Project for the Financing
and Reorganization of the Company - 1967 Report prepared by Raytheon Elsi S.p.a. t (hereinafter referred
to as « 1967 Report t}, Memoria!, Annex zz, p. 7· ·
( 4} See Letter-agreement of zi October 1956: Memoria!, Annex II.
(6) See for these fìgures « 1967 Report •,. p. 35·
(6) See documenta N. 31, containing the minutes of the meeting of the ELSI Board of Directors, at which the
merger decision was taken.
6
78 RASSEGNA DELL'AVVOCATURA DELLO STATO
3· The basic reasons underlying the economie weakness of ELSI.
The truth is that ELSI had been a loss-maker from the very beginning. The bulk of its products
were cathode tubes and semi-conductors (1), and it is common knowledge that if products
of this kind are to make a profit, they must be manufactured in the immediate vicinity of the
raw materials suppliers (particularly the producers of glass tubes) and of the customers for the
finished products (the radio and TV manufacturers). But ELSI had been set up at Palermo, far
away from the large industriai settlements in the North of Italy, with the result that, only because
of the extra cost of transportation, the prices of its products were at least IO % higher
than those of its competitors (8). Moreover, some products were being manufactured using
methods that were manifestly outdated. This is the case of the semi-conductors, whose production
line (which ELSI had purchased directly from Raytheon) was technologically obsolete
already at the time it was installed (9). Other products did not bave reliable market outlets, or
their market was dwindling to nothing. For example, sales of microwave tubes depended very
largely on sporadic military orders. The cathode-ray tubes, which were solely for black-and
-white television sets, were losing their prospective purchases because in the mid-6o's, ltaly
was about to introduce colour television (1°).
Ali of this was taking piace with manifestly disproportionate labour costs. In 1960, the
company employed 530 people, rising to over I,ooo in 1967. Training costs were initialiy amply
offset by the lower wages paid to workers in Sicily, but when wages in the area began to draw
level with those of the rest of the country, the company's labour costs grew out of ali pro
portion (11).
4· Raytheon's initial apathy towards ELSI; the high cost of its technical assistance.
There can be no doubt that many of ELSI's problems could have been avoided if Raytheon
had shown greater concem about ELSI's fate. But it did not. The very decision of acquiring a
participation in ELSI was taken on the spur of the moment, rather than as the results of a clearly
thought-out pian (12), and even afterwards, as far as its investments in Italy were concemed, Raytheon
continued to concentrate its attention on SELENIA. This company, which was controlied
by Raytheon jointly with FINMECCANICA-IRI and FIAT, manufactured sophisticated military
equipment with satisfactory commerciai results (13), while ELSI was ignored for many years.
The company continued to be managed by two ltalian technicians- Carlo Calosi and Aldo
Profumo, as President and Managing Director, respectively- who had already been employed
by the former owners: this despite the fact that under their management the company had only
recorded losses. Tom Philips, the President of Raytheon from 1964, was reported as having
said on the subject of the managerial choices made by the two Italian executives: « [ ... ] It seemed
that more emphasis was being placed on the social, or rather the societal importance of operations
in Sicily than on their need to retum profits to their investors » (14). Calasi an d Profumo were
not, however, dismissed from their posts until 1967 when Raytheon's top management finaliy
realized the desperate straits in which ELSI found itself. But it was too late by then, and ali
the former President of Raytheon, Charles Adams, could do was to let off steam with Calasi:
« You have made a terrible mess of things! » (15).
(7) For the exact figures see the « 1967 Report », pp. 2o-21.
(B) See Memoria!, Annex 15, p. s; OTTO J. ScoTT, The Creative Ordeal: The Story of Raytheo11, New York
1974. p. 364.
(9) See Affidavit of Ing. Busacca (Document N. 44).
(10) See in this connection the hardly reassuring analyses and predictions made by the ELSI management
itself in the « 1967 Report », pp. 9 and 24.
(Il) See, in this connection, the « 1967 Report », pp. 16-17.
(12) As ScoTT, op. cit., pp. 246-247, shows, it was owing to ELSI's delay in paying the royalties due to Raytheon
that the latter eventually accepted the proposal to convert its loans into shares of what at the time was only
an insignificant Palermo-based company.
(13) For these data, see ScoTT, op. cit., pp. 328-329 and 331-332.
(H) ScoTT, op. cit., p. 346.
(16) ScoTT, op. cit., p. 365.
CONTROMEMORIA DEL GOVERNO ITALIANO 79
In reality, the company was not only being run at a loss, but was managed on the verge of
illegality. It was not without reason that the expert witness for the bankruptcy, Giuseppe Mercadimte,
said that ELSI's standard practice was to artificiaily inctease the sales volume (probably
with aview to showing the parent colJ1pany in the United States positive results) (18). The bankruptcy
receiver; Mr. Siracusa, commenting Ori Giuseppe Mercadante's report, put the company's
insolvericy down • to the cavalier way i t · had been managed an d to the « poor organization an d
mistaken polìcies of the coìritrierciai department ,; (17).
Raytheon's apathy towards ELSI is demonstrated above ali by its very low capitai investment
in the cotnpany. In the period 1962-66, Raytheon's investments in equity in ELSI totalled a
bare 3,6oo million.
The inadequacy of these investments to meet the needs of the company is pròved by the
tacts thltt in 1966, with a share capitai of only Lire 4,ooo million, ELSI had outstanding debts
totalling Lìre xs,910 million ofwhich only Lire 4,230 million were guatanteed by Raytheon (18).
This· excessìve indebtedness naturally gave rise· to huge interest charges: Lire 839 million in
1965, Lire86s million in rè)66 and Lire g6o million in 1967. Figures of this magnitude would
bave caused a crisis in any company, but in ELSI's case the debt burden was absolutely out
of aH proportion, consideting that the company's sales during that same period nevet exceeded
Lire 8,ooo miliion, and that the item « operating profits/losses >> (sales minus production costs,
after deduction of interest charges) in the 1967 balance sheet showed a loss of Lire 1,721 million
(19).
· Moreover, while Raytheon left ELSI under-capitalized, it did not hesitate to charge very
high ratei! for the technicai assistance it supplied to its subsidiary, right to the very end, in the
period t965.;.;.67, ELSl had to pay about 8oo million. a year for « updating, preparation, studies
and other work >>, and yet during the same period a further 6so million was paid for « group
assistance royalties, and technical consultancies >> (2°).
In conclusion, there seems to be good reason for the highly criticai judgment of the expert
witness Mr. Mercadante on the subject of Raytheon's attitude to ELSI during ali those years:
«[• .. ] There are grounds for believing that the parent company, which provided assistance to
its subsidiary upon remuneration had ampie time to realize that the subsidiary's indebtedhess
was swelling progressively and growing out of ali propottion to the volume of production, and
we are surprised that the parent company di d no t see i t fit to bring the subsidiary within more
reaiistic limits » (21).
S· The I967 repQrt and the searchfor an Italian partner.
At the beginning of 1967, ELSI's accrued losses had far exceeded one third of the share
capitai, with the result that under Artide 2446 ofthe Italian Civil Code, ELSI had to reduce its
equity from Lire 4,ooo to 1,500 million. It was only at this point that Raytheon finaily decided
to act.
A delegation, headed by the Raytheon President, Tom Philips, went to Palermo, and the
first thing they did was to replace Carlo Calosi with John Clare as President of ELSl and to
appoint Justin J. Guidi as the second managing director of ELSI, alongside Aldo Profumo.
At the reqUest of the parent company, ELSI's new management prepared the « Project for
the Financing and Reorganization of the Company- 1967 Report », in which they thoroughly
analyzed the causes of the crisis and the possibilities of pulling out of it. The prospects that
lay ahead were dramatic. The report made no bones about the fact that, if one had left the company
to its own devices, its days were practicaily numbered: << Given the current product base,
the current level of spending and the increasing adverse pressures mentioned above, heavy
(16) See Document N. 36, pp. 20-:n.
(17) See Document N. 40, p. 4·
(18) « 1967 Report », p. 35, and ibidem, Appendix B2.
(19) Memoria!, Annex 13, Schedule B3.
(20) See Documimt N. 36 pp. 15 and 27.
(21) See ibidem, p. 29.
80 RASSEGNA DELL~AVVOCATURA DELLO STATO
losses will continue and in all probability increase ... » (p. 36); « The current product and people
structure of Raytheon Elsi does not produce desirable results., and in fact continued operations
on the current basis is quite unsound » (p. 37). The only chance of survival was indicated to
be an intervention by Italian authorities to the effect that, inter alia, (a) ESPI (Ente Siciliano per
la Produzione Industriale) would irnmediately invest in ELSI Lire 6,ooo million as additional
capitalization of the company; (b) the centrai Government would guarantee that over the next
four years ELSI would receive government procurement orders for not less than Lire s,ooo million;
(c) the personnel would be given retraining courses organized at the expense of the Sicilian
Regional Government; (d) the centrai Government would undertake to do what it could so that
ELSI could obtain all the other financial facilities available under current legislation for the
development of Southern Italy (pp. 37-39).
On being informed of the gravity of the situation, the Italian authorities immediately stated
their readiness to examine the possibility of a solution acceptable to everyone in joint consultation
with the ELSI management. In no way did they reject altogether the suggestion of public
intervention on behalf of the ailing company. It was simply a question of defining the terms of
intervention, since it was unthinkable that all of ELSI's demands might be accepted. The Sicilian
Region Government irnmediately pointed out that the financial contribution it was being
asked to make exceeded its resources, and that at all events, it would acquire a direct stake in
ELSI only if it was joined by another partner, possibly a company of the IRI group. Raytheon
had itself already been in touch with some companies on its own account. But IRI's response
was decidedly negative. IRI was studying the possibility of enhancing its own companies' presence
in the electronics sector, and it was therefore not at all interested in helping ELSI which
- at least according to the restructuring plans elaborated by the company's managementwould
have inevitably become their direct competitor (for further details, see infra, paragraph 18).
6. ELSI's financial difficulties and the labour disputes: I967-68.
Meanwhile, ELSI's difficulties went from bad to worse. The balance sheet of 30 September
1967 closed with a loss of Lire 2,681 million, with the result that less than one year after the last
reduction, the company's share capitai should have been reduced once again because of losses.
The company directors, who, under Artide 2446 of the Italian Civil Code, should have asked
the shareholders already before the end of the fiscal year « to take the appropriate steps », did
nothing of the sort even after that date: and yet the losses continued to increase also in the las t
quarter of 1967 and the first quarter of 1968. According to the estimates of Raytheon's expert
accountant, on 31 March 1968 ELSI had accrued losses of Lire 3,750 million (22). This being
so, ELSI's management clearly failed to comply with its duties under ltalian law to protect the
company's creditors (not to mention its shareholders!) in the event of persistent losses totalling
over one third of the share capitai (23).
ELSI's financial difficulties were compounded by serious labour disputes during that same
period. Already in }une 1967, because of the uncertain market prospects and the need to cut
its exorbitant production costs, the company had announced the shedding of 300 jobs. Faced
with the inevitable protests on the part of the trade unions and the threat of a solidarity strike
by all the workforce which would have brought production to a complete halt, the Sicilian Regiona!
Government immediately carne to ELSI's rescue. An agreement was concluded under
which the company agreed not to dismiss all the 300 employees, but merely to lay off temporarily
168 of them, and the Regional Government undertook to pay the wages of the laid-off workers
until they were able to resume work (24). Fora few months, peace was restaured in the factory,
but at the beginning of 1968, when it became clear that not only would the company never be
able to take back the laid-off workers, but also that its days were numbered, serious union unrest
resumed. In January and February 1968, the days on which the whole workforce, or specific
(22) Memoria!, Annex 13, Schedule BI.
(23) For the full text of artide 2446, Civil Code, see Documents N. 19.
(24) The claim of the Raytheon Co. and Machlett Laboratories, lnc. against the Government of Italy in connection
with Raytheon-Elsi S.p.A. (hereinafter referred to as « The Claim »).
CONTROMEMORIA DEL GOVERNO ITALIANO 81
departments, were on strike were more numerous than those of norma! activity. In early March,
the company decided to dismiss the I 68 laid-off workers.
The reaction of the workforce was immediate. On 4 March 1968, the company's workforce
was called out on an indefinite strike, and a sit-in on the factory premises began (25).
To have an idea of the generai situation at ELSI at that time, it should be borne in mind
that even before the workers' si t-in, precisely on 2 March 1968, ali that remained of the company's
administration, including its accounting records, was transferred wholesale to a small regional
office in Milan (26), and thereafter the Board no longer met at the Palermo headquarters, but
began instead to meet in Rome. After January 1968 the accounts for the company's operations
were no longer kept properly, and when Arthur Schene, the Vice-President of Raytheon's Board
of Auditors was summoned urgently to I taly in early Aprii to draw up the balance sheet for the
liquidation of the company, he had to work on the basis of records that had been kept only up
to 31 December I967 (27). Only afterwards, in their petition for bankruptcy, did the directors
try to explain this further example of malpractice which - incidentally - is a criminal offence
under the Italian Bankruptcy Act (28). The reasons advanced for having been prevented from
keeping the accounts properly were- in order of appearance- the Christmas and the New
Year's holidays, the earthquake that struck part of Sicily in J anuary, and the strikes ... (99).
7. The decision to liquidate ELSI : the actual prospects of an « orderly liquidation ».
On 16 March 1968, the Board of ELSI, «in view of the continuous deterioration of the company's
financial situation >> decided to put the company into liquidation. More specifically, << production
was to be discontinued immediately, whereas commerciai activities and employment
contracts were to be terminated on March 29, 1968 ,, (30).
According to the United States Government, this decision was taken by ELSI's two shareholders
with the view of beginning an « orderly », or as it is elsewhere described, « voluntary >>
liquidation of the company, «in order to minimize their losses ». The claimant Government also
contends that only after the Mayor of Palermo had requisitioned the factory the company's
financial conditions worsened to such a degree that banckruptcy became inevitab'e (3 1
).
But this is far from the truth. ELSI's decision to halt production immediately and to stop
any commerciai activities within two weeks, was by no means a free choice: it was a matter of
absolute necessity. On 7 March 1968, Raytheon formally notified ELSI that, even though it
had noted that « ( ... ) Raytheon-Elsi requires additional equity capitai in order to continue
its operations ( ... ), Raytheon company cannot obblig1te itself further and must decline to
subscribe to any further stock which might be issued by Raytheon-Elsi or to guarantee any
additional loans which might be made by others to Raytheon-Elsi » (32). ELSI was therefore
certain that it could no longer count on Raytheon for even the slightest help. And since its
coffers had dried up a long time earlier, the only way to meet its commitments shortly falling
due for payment was to liquidate its assets.
After ali, this had been bluntly anticipated by the President of ELSI, John D. Clare, at a
meeting on 20 February 1968 with the President of the Sicilian Regional Government, Vincenzo
Carollo. According to the full version of the minutes of that meeting, drafted by ELSI, and
(25) See Memoria!, Annex 81, p. 20 (containing the decision ofthe Court of Appeal of Palermo of 24 January
1974); see also << The Claim »,p. 29, where reference is made to «complete strike ... which was never settled >;a further
explicit admission in this connections is made in the explicative report of ELSI Board of Directors, attached
to the petition in bankruptcy, see Document N. 32.
(26) See Memoria!, Annex 30, containing a statement to this effect by Domenico A. NETt, an ELSI Auditor.
(27) See Memoria!, Annex 13, pp. 8-9.
(28) Compare Articles 216-217 of the ltalian Bankruptcy Act, the full text of which is contained in Document
N. 21.
(29) See Explanatory Report on the petition in bankruptcy (Document N. 32).
(30) See Memoria!, Annex 31, p. 4·
(31) See Memoria!, p. xo et seq.
(32) See Charles F. AnAMs's letter to John D. CLARE, attached as Exhibit III-13 to « The Claim •, but omitted
in the Annexes to the Memoria!.
82 RASSEGNA DELL'AVVOCATURA DELLO STATO
annexed as Exhibit II-IS to « The Claim n, « [ ••• ] CFA [Charles F. Adams, ed.] stressed that
ELSI cannot survive without immediate cash help, which Raytheon cannot provide. JDC
[John D. Clare, ed.] drew a precise time chart showing (a) Feb. 23 - Board meeting; (b) Feb.
26-29- ìnevitable bank crisis; (c) March 8- we run out of money and shut the plant ». Surprisingly,
the text of the minutes that appears as Annex I s to the Memoria!, Exihbit B, has
been altered, and the words quoted above have been replaced by the insignificant words « Both
CFA and JDC stressed again the urgency of the situation ».
Moreover, the conclusive evidence that the liquidation of ELSI, which was decided by
the Board on I6 March I968, was anything but « orderly n, is given by the company's balance
sheet at that date. On JI March I968, the company had outstanding debts totalling Lire I6,292
million, of which Lire 4,8ss million was owìng to preferential creditors, and Lire II,4JS million
to unsecu:r;ed creditors (33). To meet these debts, the company had assets whose book value
was Lire I7,0SJ million, but whose quicksale value had been calculated by ELSI's expert
accountants as no more than Lire Io,838 million (84).
Even supposing, for the sake of argument, that everything had gone as planned by ELSI,
namely, that the sale of the assets had made Lire I0,838 million (3 5), after deducting the amount
needed to pay the preferential creditors, the remainder would only have been sufficient to pay
so % of the unsecured creditors! But if this is so, it is patently evident that what is now presented
as an orderly and voluntary liquidation, decided by the shareholders in order to avoid further
losses, was in reality a desperate attempt on the part of an insolvent company to avoid bankruptcy
by having its creditors accept an amicable settlement.
The ELSI management were perfectly well aware of the real meaning of the decision taken
on I6 March I968: « With the proceeds of the sale it was ELSI's intention to satisfy ali the creditors
in an amicable way '' (36). lndeed, they also knew perfectly well that in order to succeed
in their endeavour they had to obtain at least the tacit approvai of ali the creditors. If only one
creditor had demanded to be paid immediately and in full, bankruptcy would have been unavoidable.
This is why the liquidation pian provided for the full payment not only of the preferential
creditors but also of the mass of small creditors: as it was stated, the danger was that « [ ••• ] a
small irresponsible creditor would take precipitous action which would raise formidable
obstacles in the way of orderly liquidation ,, (37).
Such a risk apparently represented a sort of nightmare for Raytheon : indeed, despite the
fact that it had formally announced that it would never pay ELSI an extra lira, it immediately
arranged to pay ELSI Lire I so million to silence the more unruly among the small creditors (38).
But the large creditors, who were being asked to accept so % of the amount owed them,
were six banks which had outstanding claims of about 9,ooo million against ELSI, of which
just over a half was guaranteed by Raytheon (39). In the Memoria! of the United States Government
one reads that « Raytheon reasonably anticipateci, however, that the bank creditors with
large unsecured, unguaranteed loans would quickly settle their claims at no more than so %
of this value as part of the orderly liquidation, as such a settlement would guarantee prompt
and substantial payment, as compared with receiving little or nothìng in bankruptcy n (40). There
(33) Memoria!, Annex 13, Schedule F.
(84) Memoria!, p. 6o. For an indication of the criteria followed for the determination of the « quick-sale value •,
see Memoria!, Annex 17, p. 4 et seq., whereas fora comparison between the different items in the balance sheet and
in their estimate quick-sale value, see ibidem, Exhibit A.
( 35) The hypothesis that the « book value ~ of 17,053 million could be realized is not even worth being taken
into consideration, although the United States Government is now claiming that it was the most likely one (Memoria!,
pp. II and 6o-6x). Not only at the time all ELSI (and Raytheon) plans and calculations were based on the
« quick-sale value » (See, in this connection, Charles F. ADAM's Affidaviti, Memoria!, Annex 9, p. x o; Arthur
SCHENE's Affidavit, Annex 13, p. 7, Joseph A. SCOPELLITI's Affidavit, Annex 17 p. 8), but also in the Raytheon and
Machlett claim of 1974 against the Italian govemment this was the value which had been chosen for the computing
of damages.
(36) See << The Claim », p. 33·
(37) See << The Claim •, p. 33·
(3R) See Memoria!, Annex 17, p. 8.
(39) For the exact figures, see Memoria!, Annex 13, Schedule E.
(40) See Memoria!, p. u.
CONTROMEMORIA DEL GOVERNO ITALIANO 83
is no telling whether ELSI's directors really were so sure that they would be able to reach an
immediate agreement with the banks: the fact is, that on I Aprii 1968, not knowing what the
Mayor of Palermo was about to decree, the parties held yet another meeting which carne to nothing
(41). Yet the passage just quoted from the Memorial is mentioned not only because it alleges
that an agreement between ELSI and the banks was a foregone conclusion, but also because
i t openly states that the banks had everything to gain by being content wi1h ·so % of their loans
because « such a settlement would guarantee prompt and substantial payment, as compared
with receiving little or nothing in bankruptcy »l This statement clearly implies that from the very
moment in which the « orderly » liquidation of ELSI had been decided, the only real prospect
for the company was either bankruptcy or an << amicable settlement » with the creditors. And
ali the parties were perfectly well aware of this: ELSI, Raytheon and the banksl
8. The requisition of ELSI's plant and equipment; its legal basis, nature,jùstification and effects.
On I Aprii 1968,theMayor ofPalermo ordered that the plant and equipment owned byELSI
be requisitioned for a period of six months (42). This decision is the main point on whièh the
charges made by the Government of the United States against the Italian authorities are hinged.
It therefore appears necessary to darify the nature, the content and the effects of the Mayor's
decree.
We shall begin by pointing out that under Italian law the legai basis of the decree is Artide
7 of Law N. 2248 of 20 March I86s, Annex E (the so-called administrative litigation law) (43).
The artide ·in· question states that << when because of grave public necessity, the administrative
authorities must dispose of private property without delay ... the administrative authorities
will proceed by means of a decree indicating the reasons, without prejudice to the rights of the
parties >>. This means that the administrative authorities are empowered to « dispose of private
property » an d therefore also to · take requisition measures, provided that this is justifìed by a
state of <<grave public necessity » and of urgency (there is the need to act « without delay »);
however, the parties must be ultimately compensateci.
If the private property concemed consists of immovable property and it has been requisitioned
in accordance with the above-mentioned law, there can only be a « requisition in use » ('4
).
As a rule, the extension of the requisition measure will depend on the duration of the state of
necessity: in any case, the decree itself must be accompartied by an indication of a time limi t
(in the case in hand, this was six months) which may be further extended upon expiry. Within
this time limit, the authority can use the immovable property, but cannot acquire it or sell it
to others. All this is implicit in the terms « without prejudice to the rights of the parties »;
The difference between requisition in use an d expropriation is dear: expropriation deprives
the private individuai of his right of ownership, which is transferered to the administrative authority
expropriating the property. On the other hand, requisition in use deprives the owner only
of the use of the property over a certain period of time. Under ltalian law, expropriation is regulated
by specifì.c legislation, notably Law N. 2359 of 25 June x865 (on compulsory expropriation
in the public interest), and is also covered by a provision in the Constitution (Artide 42,
paragraph 3, according to which «private property, in such cases as are provided for by law
an d upon payment of compensation, may be expropriated for reasons of public interest »); requisition
in use, on the other han d, is covered by the above-mentioned Artide 7 of La w N.
2248 of 20 March x865.
Three aspects of the content of the decree issued on I Aprii 1968 by the Mayor of Palermo
deserve special mention: the provisions explicitly referred to, the detailed reasons given and
the measures actually taken. With regard to the fì.rst aspect, it is noteworthy that the decree
referred not only to the above-mentioned Artide 7 of Law N. 2248 of 20 March x865, Annex
E, but also to Artide 69 of the regionallegislation governing local authorities, namely Legisla-
(41) See << The Claim &, pp. 34-35.
(42) See Memoria!, Annex 33·
(48) See Memoria!, Annex 34·
(44) See SANDULLI, Manuale di diritto amministrativo, 13th ed., Naples 1982, P• 789,
84 RASSEGNA DELL'AVVOCATURA DELLO STATO
tive Decree N. 6 of 29 October 1955 of the President of the Sicilian Region (4ll). Under the
heading of 11 orders based on emergencies and urgency », the latter provision (paragraph I) states
that 11 the .Mayor issues emergency and · urgent orders in matters of civil works, local poli ce and
health for reasons of public health and safety ». It thus underlines and defines the Mayor's
powers also to take, inter alia, urgent measures in local police matters for reasons of public safety.
The Mayor's authority to dispose. of private property on this basis was considered to be 11 unchallengeable
» (11 indubitabile ») by the Prefect of Palermo when he was called upon to rule on
the appeal taken by ELSI against the requisition decree we are examining (46). The decree was
justified on a number of circumstances: in the first piace the decision by ELSI to shut down
its plant and dismiss about one thousand employees, a decision that was followed by the strikes
called by trade:unions with the support of public.opinion. Other relevant considerations were
the damage to local economy, the strong interest shown by the press and the danger of law and
order. being perturbed .. All these circumstances .led the Mayor to form the opinion that the
condÌ.tions of grave public necessity and urgency specified in particular in Artide 7 of Law
N. 2248 of2o March 1865 actually existed in the ELSI case.
As already seen, the decree · issued by the Mayor of Palermo provided for the requisition,
for the duration of six months and 11 except as may be necessary to extend such period, and without
prejudice for the rights of the parties concerned and of third parties », of the plant and equipment
owned by ELSI. The sal:ne decree acknowledged the right of the company to be paid
compensation for the requisition, although the assessment of such compensation was deferred
to a subsequent order. ·
The requisition decree did not deal with the measures to be taken for the purpose of the
temporary management of the plant; provision for this was made by the Mayor immediately
afterwards by means of separate orders. · On 6 Aprii 1968, the Mayor issued a special order
· entrusting the management of the plant to Mr. Aldo Profumo, the managing director of ELSI,
also 11 for the purpose of avoiding damage to the equipment and machinery due to the cessation
of all activities.including maintenance ,, (47). After Mr. Profumo refused to accept this appointment
and to carry out the tasks assigned to him in the interest of ELSI, on 16 Aprii the Mayor wrote
to Mr. Silvio Laurin, the senior company director, to notify him that 11 ( ... ) in view of the continuing
absence of Ing. Profumo, to whom the management of the requisitioned plant had been
entrusted, I hereby appoint you to replace him temporarily in the same capacity with the same
powers, functions and limitations. The choice of yourself is justified by the need ( ... ) to ensure
the coordination of management activities to safeguard the interests of government authorities
and .the rights of third parties ,, (48). Mr. Laurin accepted the appointment. The Mayor also
appointed Mr. Armando Celone and Mr. Nicolò Maggio as bis representatives to enforce his
orders in the factory (49).
9· Precedents concerning the requisition of plants ordered by other ltalian local authorities
(I950-I986).
An examination of Italian judicial decisions concerning the requisition of industriai plants
during the years 1950-1986 indicates that the requisition of plants was not episodic in
nature but was often used to protect existing jobs in plants facing the threat of closure.
Under the circumstances, its purpose .was that of preventing the financial difficulties of certain
companies from having negative repercussions on workers' employment. Emblematic in this
regard is the well-known 11 Marzotto affair », which.arose out of the decree to requisition a plant
of Marzotto S.p.A. of Valdagno issued by the. Mayor of Pisa on 25 June 1968 (60). Another such
case is that of a plant of S.p.A. Torrington, a company in liquidation which was requisitioned
(46) See Memoria!, Annex 35·
(46) See Memoria!, Annex 76.
(47) See Document 34·
(48) See Document 35.
(49) See Document 33·
(60) See decision N. 3o86 Q{ the Court .of GassatiQn of 23 October 1974 (Document N. 23).
CONTROMEMORIA DEL GOVERNO ITALIANO 85
by the Mayor of Genoa in order to prevent it from being dosed down and the employees from
losing their jobs (51). A third case is that of a plant belonging to the Italiana Zuccheri company,
which was requisitioned for 90 days by the Mayor of Chieti on 16 July 1974 and handed over
to the Abruzzo Development Agency, which was given the task of managing it so as to avoid
the suspension of activity and thus to safeguard job stability (52).
Also worth mentioning are the cases of Soc. SITE, whose plant was requisitioned by
order of the Mayor of Padua on 29 September 1974 just as it was about to be dosed down (53)
and Soc. Manifattura dell'Adda. The latter company's plant was requisitioned by the Mayor
of Berbenno di Valtellina in order to ensure the continuity of its productive activity, which
was considered to be essential for the economy of.the area (54).
On other occasions requisition of a company plant has been ordered so as to ward off the
negative . repercussions on the economy an d la w an d order caused by prolonged suspension of
the company's productive activities. This is the cases of Soc. Terites and Soc. San Marco,
whose plants were requisitioned in order to.safeguard the future activity of the plant in the interest
of local employment and of law and order (55). Then there is the .case of the plant of Soc.
SIDELM, requisitioned by the Mayor of Brindisi on 14 September 1974 for reasons of
law and order and to ensure the continuity of productive activity in a plant considered essential
for the economy of the area and the public interest (56), and that ofthe Felice Fossati cotton milis,
which was requisitioned by the Mayor of Sondrio on 2 February 1975 in order to ward off the
threat to law and order due to the plant dosing down (57). The best known case is stili, however,
that of Soc. Eridania, whose plant was requisitioned by the Mayor of Cremona in order to avoid
damage to the economy of the area and the threat to law and order caused by the company's
plans to dose down the plant.
A similar decree was issued against Soc. Eridania Zuccherifici Nazionali shortly afterwards,
on 5 December 1968, by the Mayor of Ferrara (68).
The above-mentioned cases show that the requisition of the ELSI plant was by no means
an isolated event, let alone the result of persecution of a company controlled by United States
shareholders. In fact, it is dear that the authority given to the Mayor by Artide 7 of La w N.
2248 of 20 March 1865, Annex E, has very often been used in similar cases to that of ELSI.
10. Compensation for the damage caused by the requisition.
l t has already been pointed out that the requisition decree of the Mayor of Palermo recognized
the principle that ELSI was entitled to compensation. It is true that this recognition
was not followed by any action by the Mayor to determine the amount of such compensation.
However, it should be borne in tnind that some days after the requisition (that is, on 19 Aprii
1968) ELSI lodged an appealwith the Prefect of Palermo, daiming that the decree was illegitimate
(69
). After the favourable decision of the Prefect on 29 December 1969, the bankruptcy
receiver sued the Ministry of the Interior before the Tribuna! of Palermo on 29 December 1969,
daiming damages for the requisition (60). This claim was rejected by a decision of 2 February
( 51) See decision N. 72 òf the Council of State, Section IV, of 7 February 1978 (Document N. 29).
(52) See decision N. 198 of the Abruzzo Tribunale Amministrativo Regionale of 30 December 1976 (Document
N. 24).
( 63) See decision N. 208 of the Council of State, Section IV, of 25 February 1975 (Document N. 26).
(64) See decision N. 210 of the Lombardy Tribunale Amministrativo Regionale of 30 July 1975 (Document
N. 27).
(66) See respectively decisions by the Prefect of Milan of 12 November 1971, Il Foro Italiano - Repertorio
(1972}, Requisizione, N. 7, and by the Prefect of Cremona of 28 November 1975, ibidem (1976), Requisizione, N. 23.
( 66) See decision N. 3 of the Apulia Tribunale Amministrativo Regionale of 28 January 1975 (Document
N. 25).
(67) See decision N. 21 of Council of State, Section IV, of 18 January 1977 (Document N. 28).
(68) On these cases, see respectively decisions by the Prefect of Cremona on 8 December 1968 (Foro ItalianoRepertorio
(1969), Requisizione, N. 7 and by the Prefect of Ferrara, quoted in the decision No. 405 of Council of
State, Section IV, of 8 April 1975, 99 Il Foro Italiano (1976) III-14.
(59) See Memorial, Annex 36.
(60) See Memorial, Annex 79·
86 RASSEGNA DELL'AVVOCATURA DELLO STATO
I973 (61
) but this decision was reversed by the Court of Appeal of Palermo on 23 November
I973 (62
). The latter decision was upheld by the Court of Cassation on 26 Aprii I976 (63).
Thus, the receiver in the ELSI bankruptcy succeeded in obtaining compensation for the
damage caused by the requisition. The damages actually awarded amounted to 5 % of the
value of the requisitioned property, as assessed by the bankruptcy evaluator (exactly, Lire
I I4,0I4,7I I). Clearly, the claim for damages was based on the premise that the measure was illegitimate,
while compensation in the strict sense only applies to the case of a legitimate requisition
decree. The Court of Appeal of Palermo, in the above-mentioned decision of 23 November
I973, correctly pointed out that «in application of principles of law that have never been questioned,
any impediment to the enjoyment of private property is by itself an economie sacrifice and
as such gives entitlement to the payment of adequate compensation, when carried out legitimately
(e.g. occupation, requisition, etc.) and to the payment of damages when it is illegitimate »,
I I. Requisition and occupation of ELSI's plant; the impact of requisition on the prospect of an
« orderly liquidation » ; requisition and bankruptcy petition.
Let us now consider three points in which the version of the facts given by the claimant
Government is based on a complete misrepresentation. These points are the problem of the
relationship in time between the requisition of ELSI's plant and its occupation by ELSI's
employees, the question of the effects that the requisition had on the prospect of an orderly
liquidation of the company and the issue of whether the requisition actualiy caused the bankruptcy.
With regard to the first point, it must be recalled that the plant had been occupied by the
employees since early March I968, and not only after the requisition (64). The claimant Government's
allegation that the Italian authorities behaved in such a way as, if not actualiy to encourage
the occupation, at least to make it possible and subsequently to tolerate it (65), is far from being
true.
The only action which one way or another succeeded in calming down the ELSI employees,
who were exasperated by the company's decision to cease ali activity and dismiss ali its workforce,
was the requisition decreed by the Mayor. Rightly or wrongly the employees saw this
as an affective way of safeguarding their position. This is why, after the requisition, the occupation
quickly took on a purely symbolic character with ali the workers now feeling directly responsible
for everything that happened inside the factory. It is a fact that - as expressly stated
also in the above-mentioned decision by the Tribunal of Palermo on 2 February I973 - the
occupation not only caused no ascertained damage to the equipment and materia! located in the
factory but did not even prevent the regular performance of the winding-up operations.
With regard to the company's « orderly >> liquidation pian and the effects of the requisition
on it, it must be pointed out from the outset that ELSI was already insolvent when the requisition
decree was issued. The company, whose assets in the estimation of its own management
had a quick-sale value of no more than Lire I0,500 million, had accumulated more than Lire
I6,ooo million in debts. Mter its two shareholders refused to contribute further capitai, the
company was forced to liquidate part of its assets to meet its commitments when they feli due.
As both Raytheon and Machlett were tostate in their I974 claim against the Italian Government:
« At the end of the month of March Ig68, the situation relating to ELSI was as foliows: ( ... )
ELSI had run out of money and had no prospect of receiving funds except from the sale of
assets ( ... ). Substantial payments were due from ELSI, the maturities of which had not been
extended >> (
66).
(61) See Memoria!, Annex So.
(62) See Memoria!, Annex 81.
(63) See Memoria!, Annex Sz.
(64) See supra, paragraph 6. The claimant Government's contention that « the occupation began only after
the Mayor - an Italian government official - had assumed custody of the plant ~ (Memoria!, p. 54) contradicts
evidence.
(65) See Memoria!, p.p. 53 54 et seq.
(66) « The Claim ~. pp. 35-36.
CONTROMEMORIA DEL GOVERNO ITALIANO 87
The « orderly » liquidation decided by the Board of Directors on I6 March 1968 was therefore
only a bluff. An « orderly )) and voluntary liquidation presupposes that the company has
sufficient assets to fully satisfy its creditors (67).
In the case of ELSI it was common knowledge from the outset that in the best possible
case the unsecured creditors would receive only so % satisfaction: had one of them refused
the settlement and requested full payment, bankruptcy would have inevitably ensued. Under
these circumstances, the ELSI management was under an obligation, also according to criminal
law, either to file for bankntptcy orto formally propose an amicable settlement to ali the creditors.
The truth is that ELSI had actually been in a state of virtual liquidation already from the
beginning of the year (and its plant had been occupied by the employees ever since early March).
If it was not possible to sell on the open market all or part of its assets at the prices fixed in the
company's cc orderly )) liquidation pian, the fault did not lie with the Mayor's requisition, which
was issued only on I Aprii 1968. The fact is that even before this event no one was willing to
purchase at those prices the assets of a company which was dearly insolvent.
In any case, it must be ruled out that the bankruptcy was a consequence of the requisition,
as is daimed by the Government of the United States (68). In this connection, it may be sufficient
to recall the statement of the Court of Appeal of Palermo in the above-mentioned decision
of 23 November 1973: cc The fact that the Company was insolvent during the time immediately
prior to the Mayor's intervention - in connection with which we recall the many and noisy
demonstrations which this gave rise to, as we are reminded by the Court - is sufficient to rule
out any causai link between the subsequent requisitioning order and the Company's bankruptcy
and that the Company's state of insolvency was decisive and sufficient cause for its failure (Artide
s, Bankruptcy Law) )) (69).
12. The appeal against the requisition decree.
The requisition decree of I Aprii 1968 was appealed against by ELSI to the Prefect of
Palermo 18 days later (on 19 Aprii 1968). A much shorter time was to pass between this appeal
and the bankruptcy petition, filed with the Court of Palermo by the company on 25 Aprii. Therefore,
while the appeal against the decree was pending, the bankruptcy proceedings were opened.
At the same time increasing e:fforts were made to find a definitive solution to the problems of
the company. It can therefore be said that, from the month of Aprii 1968 onwards, three parailei
events were in progress: the appeal proceedings against the requisition decree, the bankruptcy
of the company, and the rescue operation in which IRI became more and more involved. We
shall describe each of these events, taking the interactions between them into account.
13. The decision taken by the Prefect of Palermo on the appeal.
The ELSI appeal to the Prefect of Palermo requested the setting aside of the requisition
decreee. It was daimed on the one band that the laws oh which the requisition was based (Artide
7 of Law N. 2248 of 20 March 1865, Annex E; Artide 69 of the Legislative Decree N. 6
of the President of the Sicilian Region of 29 October 1955) had been violated and, on the other,
that the Mayor had misused his powers. It should be noted that the Prefect's decision of 22
August 1969 rejected the arguments concerning the first issue and thus ruled that the abovementioned
laws had been correctly applied. In particular, the Prefect pointed that cc it is undisputed,
in case-law and legai doctrine, that the Public Administration is empowered by the
(67) See Articles 6 and 160 of the Italian Bankruptcy Law (Document N. 21) according to which it is primarily
up to the insolvent enterprise itself to request the declaration of its bankruptcy or alternatively to propose an amicab!
e settlement to the creditors. Accordingly, Art. 217 N. 4 of the same law states that the debtor shall be sentenced
from 6 months to 2 years of imprisonment if he has aggravated the economie situation by abstaining from
petitioning for the declaration of bankruptcy or by other serious negligence.
(68) See Memoria!, p.p. 39-40.
(69) Memoria!, Annex 8 I, p. 14. Artide 5 of the above--mentioned Bankruptcy Law states: « Any entrepreneur
in a state of insolvency sha!l be declared bankrupt. The state of insolvency is revealed by cases of default or by other
externa! facts which indicate that the debtor is no longer able to meet his obligations regularly ».
88 RASSEGNA DELL'AVVOCATURA DELLO STATO
above-mentioned Artide 7 to dispose of the private property whenever the necessity exists
to face a situation of actual and imminent danger for a public interest (public health, public
order, etc .... ) and therefore the grounds of an urgent emergency are given ».
However, the Prefect ruled that the decree appealed against was nevertheless illegitimate
since, in his view, « the purpose to which the requisition was directed could not be actually
achieved by the order "; in other words, the Mayor had not taken account of the fact that the
company could not continue its activity unless there were interventions capable of solving its
financial and industriai problems. This was the only reason why the Prefect upheld the appeal
and set the requisition decree aside.
14. The delay Qj the Prefect's decision.
One of the charges made by the Government of the United States against the Prefect's
decision is that it was delayed. It was in fact delivered 16 months after the appeal taken by
ELSI. The daimant Government contends that this delay was quite unusual for normal Italian
practice and that at the time the requisition was dedared illegitimate, it had already irremediably
produced its effects (1°).
With regard to Italian practice the Government of the United States relies on an affidavit
by the legal counsel of Raytheon (71), to the effect that the average time taken by prefects to
decide upon appeals against requisition orders issued by mayors is about one month. The
Chief of Staff of the I talian Ministry of the Interior has instead dedared that the average time
is about one year (12).
Quite apart from this, three significant circumstances must be pointed out. In the first place,
it must be recalled that, in accordance with Artide s, paragraph s, of the Consolidated Law
N. 383 of 3 March 1934 (Municipal and Provincia! Law), « [a]fter 120 days from the date of
the filing of the appeal without the authority with which the appeal has been filed having ruled
on the said appeal, the appellant may request the authority, after notifying it by means of a
petition, that the appeal be ruled upon (13). In the case in hand a request was made to the Prefect
only on 9 July 1969 and the appeal was decided upon about a month and a half later. In
the second piace it should be pointed out that the requisition had already ceased to have any
effect on 30 September 1968, i.e. at the date of expiry of its normal term of six months. By this
date the effects of the requisition and those of the bankruptcy, dedared on 16 May 1969, had
already long overlapped as far as the availability of the plant and its equipment were concerned.
Therefore even if the Prefect had decided on the appeal against the requisition within
a month, ELSI would not have anyway been able to make free use of the requisitioned property.
Furthermore, if the requisition was to be regarded as the cause of the bankruptcy, as the daimant
Government contends, the relevant delay in the Prefect's decision did not go beyond the seven
days elapsing between the presentation of the appeal to the Prefect (18 Aprii) and the date when
the bankruptcy petition was filed (25 Aprii). In fact, from the point of view of the availability
of the plant it would have obviously been of no use to succeed in an appeal to the Prefect after
the bankruptcy petition had been filed.
Lastly, it must be emphasized that the Prefect's. decision had the only effect that it was
actually capable of producing, i.e. it created the preliminary conditions needed for the receiver
in the bankruptcy proceedings to take action against the Ministry of the Interior before the
Tribuna! of Palermo for the purpose of daiming damages for unlawful requisition. This daim
was brought four months later, on 29 December 1969, and, as has already been mentioned, was
successful (14).
( 70) See Memorial, p. 53·
(71) See Memoria!, p. 21.
(72) See Document N. 30.
(73) See Document N. 20.
(74) See Memoria!, Annexes 79-82.
CONTROMl!MORIA DEL GOVERNO ITALIANO 89
15. The episodes characterizing the bankruptcy proceedings : zg68-zg6g.
Let us now examine the episodes characterizing the bankruptcy, which opened, as we
bave seen, with the decision of the Tribuna! of Palermo of 16 May 1968 upholding the
petition fìled by ~LSI on 25 . A.pril.
By way of introduction,. it i~ to be recalled that, under Italian Iaw, the judicial authorities
co11cerned with bankrul)tcy proceedings (i.e. the bankruptcy court and the delegated judge)
bave the statut()ry aìm of e!lSuring the best possible satisfaction of the interests of ali the creditors
through the liqitidation of the bat1krupt's assets. For bis part, the receiver, in bis capacity of
public official, acts as a close c.ollaborator of the delegated judge. ·
· The Government of the United States casts some doubts about the objectivity of the authorities
dealing with the ELSI b~ktuptcy. It further contends that the Italian Government
<< c:l.iscouragedprivate biqde~:s, boycottedthe aucticms itself, and worked out special arrangements
for a piecemeal tak~rQvet: directly with the bankruptcy authorities )) (15).
In act\lal fact, three of the a'Uctions called by the delegated judge (held on 18 January 1969,
22 March 1969 and 3 May 1969, respectively) were unattended and only at the fourth auction
(held on x2 July 1969) did ELTEL, a ri.ew company of the IRI-STET group, make a bid, which
was accepted in the absence of any other bidders. This in no way implies that irregularities
were committed by Italian authorities. Any bidders interested were invited to participate as
is shown by the fact that extensive publicity was given to individuai sales announcements published
also inthe foreign press (see the. advertisements in Corriere della Sera, Sole-24 Ore, Il Globo,
Fi'nancial Times, The New York Times, Fran/ifurter Allgemeine Zeitung, Le Monde, Le Soir,
De Telegraaj, Nihoneiza Sl#mbun (16
).
At the beginning of Aprii 1969, that is between the second and the third auction, the delegated
judge of the bankruptcy court, at the request of the receiver and with the S\lpport of the
majority of members of the creditors committee, authorized the lease of the ELSI plant to
EL TEL for a .period of eighteen months. Raytheon contended that the lease represented a prejudice
to the creditors because i t made in fact impossible a sale to third parties other than EL TEL
of the plant or ofindividual separateJines (77). llowever, the Tribuna! of Palermo, in rejecting
this conteri.tion, did not fail to point out that the lease was actually advantageous for the creditors
since, far from making the sale of the plant impossible, it actually made the sale easier, in that
EL TEL was uiider obligation to maintain the plant in perfect · efficiency and to carry out ali
the repairs and replacements due to normal wear and tear (18). No appeal against this decision
of the Tribuna! of Palermo was taken by Raytheon.
16. The sale oj the supplies and of the ELSI plant.
On 5 May 1969 the bankruptcy judge authorized the sale to EL TEL of the materia! existing
on the production lines at the price of Lire 105 million. The Government of the United
States now describes this operation as a sell-out, by arguing that the price paid by EL TEL
amounted to barely 48 % of the inventory value of the materia! in question (19). However, it
fails to consider that while judicial valuator Mr. Di Benedetto had indeed assigned an inventory
value of Lire 2i7 milHon to the materia! iriquestion, ELSI itself had previously valued it at
ori.ly Lire 193 million {80). Furthermore, it must not be overlooked that the receiver himself,
in bis request for sale authoi:ization, pointed out that the materia! was more than one year old
and therefore hard to market, and that its removal from the production line would further reduce
its value (81). Lastly, ifthe operation was truly so sU:spect, why did Raytheon merely express
(75) See Memoria!, p. 41.
(76) See « The Claim », Exhibit III-19, not attached to the Memoria!.
(77) See Memoria!, Annex 62.
(78) See Memoria!, Annex 64, p. 3·
(79) See Memoria!, pp. 19 and 42.
(BO) See « The Claim *• p. 57·
(Bl) See Memoria!, Annex 69.
90 RASSEGNA DELL'AVVOCATURA DELLO STATO
its reservations at the meeting of the creditors' committee and not appeal to the court against
the authorization given by the delegated judge ?
On 12 July 1969 the fourth auction for the sale of the ELSI plant was held. The plant
and equipment were put up for sale at the starting price of Lire 3,200 million, and the supplies,
excluding raw materials and finished products, together with the semi-finished products for
semiconductor production, at the starting price of Lire 8oo million.
The only bidder at the auction was EL TEL, to whom the whole lot was adjudicated for a
total price of Lire 4,oo6 million. According to the claimant Government this was a ridiculously
low price that EL TEL allegedly managed to impo$e by virtue · of the fact that i t was already in
renting of the plant. Allegedly, the Italian Government thus achieved its aim of having IRI
purchase the ELSI assets « without paying a freely market-determined price » (82). In this connection,
i t is necessary to clarify a gross misunderstanding. At the stage that matters had reached
(as this was the fourth auction aftel' the first three had been unattended) it was out of the question
that the sale of the plant could take piace according to a « freely market-determined price »:
the question is therefore not to see whether EL TEL had purchased « at less than fair market
price » or at a « reduced price » (88) but only whether the price paid could be considered reasonable
in the circumstances.
17. The value of the property in question and the price paid by ELTEL.
The first thing to establish is the value of the property in question, according to the various
previous estimates. The claimant Government refers to an alleged « book value >> of Lire 12,ooo
million (84), although this is a totally unreliable figure. This value is based on the Iast balance
sheet drawn up by ELSI more than one year earlìer (31 March 1968) and without the support
of regular accounting. Furthertriore, it refers, in addition to the plant and equipment, to all
the supplies existing at the time, while the supplies acquired by EL TEL at the auction were
very limited, as many articles had been previously sold by the receiver and also the remainder
was exclusive of ali raw matedals and finished products, as well as semi-finished products for
semiconductors. Only two estimated can be taken into consideration with reference to the value
of the assets in question: the quicksale value, worked out by the ELSI management itself before
deciding to wind up the compail.y and the judicial evaluation carried out by Ing. Puglisi on 12
October 1968 (85).
If we take either of these two estimates as a reference, the value of the assets actually purchased
by EL TEL basically corresponds to the price adjudicated at the auction.
Ali that remain to be done at this point is to examine the prices set in the various individuai
auctions and to see how the final figures were arrived at. The starting price set for the first
auction was Lire 4,650 million (for plant and equipment alone). For the second auction the
starting price was fixed at Lire 6,223 million (Lire 4,ooo million for the plant, and Lire 2,223
million for the supplies). A few days earlier, EL TEL had sent the bankruptcy judge a documented
valuation made by the Siemens technical office, giving the current value of the ELSI plant
and equipment as not exceeding Lire 2,770 million (86). The judge maintained the previously
fixed price and the auction was unattended. The starting price for the third auction was fixed
at Lire s,ooo million (Lire 3,200 million for the plantand Lire 1,8oo for the supplies). ELTEL
made it known that it was willing to pay the requested price for the plant, but that in no case
was i t willing to bid for the supplies, which it considered quite useless (87). The delegated judge
nevertheless remained firm in his decision to auction off plant and supplies. The third auction
(82) Memoria!, p. 20.
(BR) Memoria!, respectively pp. 41 and 43·
(84) Memoria!, pp. so-sr. ' .
(85) See « The Claim >>, Exhibit II-41, not attached to the Memoria!.
(86) See Considerations by SIT-Siemens of 5 March, 1969, contained in << The Claim >>, Exhibit lll-32,
omitted in the annexes to the Memoria!.
(87) See the petition of x6 Aprii 1969 annexed to « The Claim », Exhibit lll-33, omitted in the annexes to the
Memoria!.
CONTROMEMORIA DEL GOVERNO ITALIANO 91
was also unattended. ELTEL relented and, on 27 May 1969, informed the delegated judge
that it would be prepared to purchase the entire lot at a price of Lire 4,ooo million (88). Mter
requesting and obtaining the approvai of the receiver and the creditors (among the latter, only
the Raytheon representative expressed strong reservations), the delegated judge set the starting
price for the fourth auction at Lire 4,ooo million (Lire 3,200 for the plant and Lire 8oo for the
supplies). It should be noted that this price only .apparently coincided with that offered by
EL TEL, as the latter referred to all the supplies · contained in the stores, while the lot auctioned
by the judge excluded ali the raw materials and finished products, as well as semi-finished products
for semiconductors. Nevertheless Raytheon appealed to the Court against the delegated
judge's order, but its appeal was rejected by the Court on 20 }une 1969 (89).
In view of the above considerations it can be concluded that the price paid by EL TEL at
the bankruptcy auction was perfectly reasonable. In this context, i t may be recalled that, in the
1974 Claim put forward against the Italian Government by the applicant Government on behalf
of Raytheon and Machlett, it was contended that the price paid by ELTEL was only 300, or
a t most soo, million Lire less than the estimated realization value of the property in question (90).
This is an understandable difference considering that EL TEL was purchasing at a fourth bankruptcy
auction, after three auctions had been unattended!
18. The role played by IRI from I967 to March I968.
It may be useful to add some explanations concerning the role played on several occasions
by IRI in the attempt to rescue ELSI.
A fact of considerable interest for a correct understanding of the matter is that IRI (Istituto
per la Ricostruzione Industriale) is a public enterprise which has numerous interests in private
companies. By law it must act in accordance with the principle of profitability (see Artide
3 of Law N. 1589 of 22 December 1956) and enjoys full managerial freedom. Naturally, its
legai personality is distinct from that of the State. Only in exceptional circumstances, when it
is a matter of protecting generai interests such as the safeguarding of employment, can the Government
give IRI some directives (e.g. the purchase of unprofitable companies). However,
even in such cases the decisions ma:de by IRI are attributable to IRI itself and not to the State.
In the case in hand, the suggestion that IRI should intervene was first made by Raytheon.
It should be recalled in this connection that, bacause of the serious crisis affecting its Palermo
subsidiary, as early as Sprìng 1967 Raytheon had requested that IRI should purchase an interest
in ELSI and thus help to improve its situation. The request was rejected for a very simple
reason. According to the reorganization pian drawn up at that time by the new ELSI management,
the company was to expand mainly in the telecommunications sector, that is, in a sector
in which severa} companies belonging to the IRI group were already operating. ELSI would
therefore have become a direct competitor (91). IRI's response in early 1968 was to take a firm
stimce: '' IRI and Finmeccanica point out that in this new ELSI report there seems to be little
justification for modifying the opinion on the ELSI situation which they expressed at the previous
meeting with Raytheon. The financial support to be provided by the proposed new capitai
of 6 billion Lire is not in itself sufficiertt to improve significantly the basic operating position of
the company, which remains in an extremely serious condition notwithstanding the praiseworthy
efforts made by Raytheon to achieve a sound hasis of operations ( ... ) IRI and Finmeccanica point
out that within the IRI Group there were no concrete possibilities of ensuring a direct market
(88) See Memoria!, Annex 70.
(89) See copy of « The Claim ~ and decree annexed to « The Claim & as Exhibit 38, but later omitted.
(90) « The Claim &, p. 66.
( 91) See « 1967 Report *• which expressly states, at p. 25: << The third possible group, which would certainly
represent the major build up of new products, could come from government-owned agencies in Italy ( ... ). As
an example, a large part of the communications equipment for the ltalian PTT and the concessionary companies
is manufactured by IRI Companies ( ... ). There is certainly every reason why future telephone switching and
other communications equipment for use in Sicily and Southern Italy could and should be made in Sicily in Raytheon
Elsi ».
92 RASSEGNA DELL'AVVOCATURA DELLO STATO
outlet for Raytheon-Elsi's production. The only exceptions to this statement concem areas
of marginai interest, or areas in which other IRI companies, which already have substantial
problems of their own to be solved, are currently operating ( ... ) » (92). I t is true that IRI did not
exclude the possibility of a reappraisal some time in the future. « However, IRI desires to point
out that, even though- with great regret- it cannot accept Raytheon's request at this time,
it remains possibile that a later request by Raytheon might receive more favorable consideration
( ••• ) » (93). Nevertheless, this was said out of pure courtesy, and is explained by the excellent relations
till then prevailing between IRI and Raytheon.
At the time, the Italian Govemment refrained from putting pressure on IRI to obtain its
involvement. The situation changed considerably after ELSI's decision to cease its activity and
to liquidate its assets. ELSI's desperate financial straits clearly indicated that only a large-scale
intervention could avoid collapse with the consequent loss of more than one thousand jobs
Since the Sicilian Region had immediately stated the condition that any financial aid on its part
would be dependent on IRI participation in the rescue operation, the centrai Government now
made it clear that it would do everything to convince IRI to accept.
It should be noted, however, that if the Italian Govemment had really intended to have
IRI buy up the ELSI factory cheaply, the easiest way to do so would have been to reject Raytheon's
desperate requests for funds and to let ELSI's financial conditions to deteriorate until
bankruptcy became inevitable. And if, as was actually to happen, the shareholders of the company
refused to come to terms with reality, bankruptcy could easily have been requested by one of the
creditor banks.
Instead, the behaviour of the Italian Government was quite the opposite: it immediately
declared its availability to come to ELSI's help and even when the ELSI shareholders tried to
force its hand, ignoring the company's longstanding insolvency, and pretending to carry out
an orderly liquidation, it continued to seek a solution which would be acceptable for all concerned.
This would indeed have been a peculiar attitude to adopt for someone pursuing the diabolica!
aim of trying to take property for the benefit of IRI! Nor could it be claimed that the first
step in this direction was the order to requisition the factory, which was alleged to have caused
ELSI's bankruptcy and ali the ensuing events. The first reason for this is, as already said, that
it was not the requisition order which caused ELSI to go bankrupt as the company was already
insolvent. In the second piace the requisition was evidently a simple emergency measure, taken
mainly for the purpose of avoiding any possible disorders due to the dismissal of ELSI employees
decided by the company management on the previous day. Moreover, the fact that all parties
concerned considered it to be little more than a temporary nuisance is shown by the fact that
negotiations for the public rescue of ELSI continued without slackening even afterwards and
that ELSI itself allowed 19 days to go by before lodging an appeal against the Mayor's decree.
The truth is that the impossibility of reaching an agreement concerning the timing and
procedure of IRI action in favour of ELSI, which was then recommended by all concerned,
was not the fault of the Italian authorities but of Raytheon. Raytheon was perfectly aware that
the Italian authorities would never accept that ELSI's activities ceased overnight, leaving more
than one thousand employees jobless. Taking advantage of this fact, Raytheon continued to
act as though the ELSI crisis was none of its business and as though it was the concern of the
Italian authorities to provide for the company and its creditors.
19. The ltalian authorities' proposal fora settlement in March and April zg68.
At the end of March 1968, i.e. after ELSI's decision to cease its activity and to proceed to
an « orderly » liquidation, but before the requisition decree, the Italian authorities asked Raytheon
to reopen. the factory an d not to send the dismissal letters as announced. In return the
Government would pay the wages and shoulder most of the operating losses, until such time
(92) See Memorial, .Annex xs, Exhibit C, containing the Summary of the Talks held at IRI on January 4,
1968, between IRI Management, the Chairman of Finmeccanica and Mr. John D. CLARE.
(93) Ibidem.
CONTROMEMORIA DEL GOVERNO ITALIANO 93
as. a public coJnpany could ()pen negotiations with ELSI for the purchase or lease or its assets.
Raytheon ·l:efused (9~). · ·
T4~ same. proposal was renewed to the .company one month later, but Raytheon again
refused. This tii:ne, however, its. acceptance>would have eritailed the immediate revocation oi
the l:equìsition order" which the Mayor • of Palermo had in the meantime issued; . as well as the
pledg~. of, tp.e .• J~liaiJ; aJJ.thòrities .• • that, once.· productive activity . would · bave• · been resumed, by
mean~ ofa speeìllt management company to be set up together with the Sìcilian Region ari d IRI,
(( evety})o,ciy; inclu:diug the Region and IRI, shaU be ready to help Raytheon and in the meantime
to liquidate ELSI thtough a useiul sale in the shortest pdssible .time >~ (95). In an atteinpt to
justify the undue intransigence ()I Raytheon, the applicant Government now claims that, by
means OI this proposal, « [a]fter having requisiponed ELSI's plant and other tangible assets,
Italian authorities pressured Raytheòn to reopen ELSI at Raytheon's owri expense » (96}. In
acwatfact; rlle estall.Jisbme:n,t ()f,the ne)V ()perating C9mpany W()Uld ha:Ve .fequired Mtthe payingUP
()I. 2.9Y n~w Cl!PÌt~, hut tll,erely Raytheon's willingness to cover 40 %. OI the ptobable. operating
l()S!les, :while the rell1aining 6o % would be covered by the Region and IRI,
, .. ·,., · tJ;oweyer1, the crucial point was a different one: Raytheon, although it had made out that
it iriteJ;lcte<i',to pr()cee<,l:With the « Ot'derly » liquida#on ofEI.SI, knew vecy well that only an agree~
nt wi#l :t:he J:>an}(s wo'l;lld allo w it. to avoid having to Jwnom the gl;larantees extended to EL SI.
~a l!.b1~e,,JJ.p:t;o,,:t;h;ttitne,·:t:he banks had sh9wnlittleinçlination to come totermswith Raytheon,
it may be concluded that the latter had every interest in allowing the situation t() wotsen in the
hl)pe that~façe4,.vvitl:l, t;he,prospect 9Ì l9,sin~ t;~VfltYtlli~g. 1:he.l:>ank$woulçl soften tbeir attitude.
Tl:ui.!se appear t() \')e :t:he reij. reasons why Rllcythe9n .refused. the proposals m~de by. the ltalian
G~vert:unent. .The fact. that,. six days later, EI.SlJiled, Ior bankruptéy with .. , the Tril:>unal o I
Pa:Ier~o, also l!.PPeated as an atti;Ìmpt t() f~:>r<::e the band of the banks, which had pre:viously seeme4
Jelqçt~t ~o a<::.cept a neg<:>tiated solUti9n. Nevertheless the Italian authorities contin'l;led
their etforts t() • find a .. s~ttisf!lctQry soMi()n f9r. ,ali c~;>ncerned. .·
During the same period, the flresi<lent of t:he Sicilian Region1 Mr. Vincenzo Carollo, again
according t9. the. Government . 9f the United. States (97
). threatened · the Ray:t;heon management
hec~t'l;lse, 9ft:heir. rei:Usal· tQ. reopen the pJant •... In :fact, in the attempt · to save jobs1. Pres~dent Ca~
rollo merely made a . few reasonable predictions an d severa! personal remarks, . So when he state4
~l:J,at <~ [n]obod:y in It~tly shallp'l;lrchase, th~t Ìl.l. IRI shallnot purchase neither Ior a l9w nor
Ior a high price, the Region shall not pl;lrchase, priv~te enterprises shall not pmchase (; .. ) the
Region and. IRI and ,llftybody else who has any possibility to influence the market will reiuse in
the m()st absolute 1llanner to Iavor any sale while the plant is closed », he announced perh~ps
sornevvhat )lndipl()1llatiçally something that was really quite obvi9us: namely that the Italian
ac;lministrative au:t:horities would :tl9t :view. with I~tvour liquidati9n plans such as those envisaged
by ELS~. as they were incompatible with any realistic reorganìzation pian. But also the Iurther
« tht;eat >) that « [t]he banks which bave outstanding credits Ior approximately r6 billion Lire,
cann~;>t and will not accept. any settlement even at the cost oi dragging the Company into litigation
on an)nternationallevel ( ... ). It is obvious that evety attempt will be made (even at the
cost of long litigation) to obtain Irom Raytheon what is owed by ELSI ( ... ) » is not at ali strange.
In Iact, i t. is only to }>e,. expected that the banl!:s wo:uld attempt, to recover • their loans to ELSI
also fr~;>m Raytheon seeing thatthe latter held 99 % OI the. equity. All the banks actually claimed
payrnent 9I the ELSI debtsfrom Raythi;Ìon, but those olaims were rejected by the Italian
C9.urts (98). This despite the existence oi a number of authoritative doctrine and decisions which
(94) See Memorial, Annex 14, Exhibit G, p. 2.
(95) See Memoria!, Annex 38, p. 2; see also Memoria!, Annex 37·
(96) See Memorial, Annex 47•
(97) Cf. Memoria!, p. 14.
(98) See, in particular, Court of Cassation, decision N. 5143 of 7 October 1982 (finaljudgment against the
Cassa Centrale di Risparmio Vittorio Emanuele); Court of Cassation, decision N. 6712 of 9 December 1982 (final
judgment against the Banca Commerciale Italiana); Court of Cassation, decision N. z879 of9 May 1985 (finaljudgment
against the Credito Italiano). The texts of the three decisions are attached as documentlf N. 41-43 to the present
Counter-Memorial.
7
94 RASSEGNA DELL'AVVOCATURA DELLO STATO
claim that the principle embodied in Articles 2362 of the Civil Code, according to which a sole
shareholder is liable for the company's debts in the case of insolvency (99), equally applies whenever
an insignificant number of shares is being held by figureheads or controlled companies (1°0
).
Then there is the fina! remark by President Carollo that « [i]n the event that the plant shall be
kept closed ( ... ) the requisition shall be maintained at least until the courts will have resolved
the case. Months shall go by( ... )». Despite the efforts by the United States Government (1°1
) to
show that this was a threat to maintain the requisition for an indefinite period, it was actually
a prediction of what could have happened, but in fact did not occur as the effects of the requisition
decree expired after six months.
20. The attitude of the Italian authorities in the following months.
On 2S July 1968 the Minister for Industry and Trade announced in Parliament that two
measures had been adopted in favour of ELSI. The first, of a temporary nature, consisted in
the pledge by the Sicilian Region to continue to pay the employees' wages for two months after
the company would have resumed activity; a total of Lire 700 million were appropriateci for
this purpose (102). The second consisted of the establishment of a management company by
the Region and other public agencies which would allow productive activities to be resumed until
such time as the financial problems of ELSI could be finally resolved, if possible through settlement
out of court (1°3).
The true objective of the Italian authorities thus remained negotiated settlement. For
this purpose contact was resumed with Raytheon and, after a number of meetings held during
the Summer, it seemed that an agreement was just round the corner: an IRI Group company
would purchase the plant as it was, without the supplies (i.e. only the fixed assets) for the price
of Lire 4,ooo million. These funds, plus the revenue from the sale of the remaining company
assets, would be used to pay the costs of bankruptcy and the secured creditors in full, as well
as 40 % or even so % of the claims of the unsecured creditors, while Raytheon would not have
to honour the guarantees extended to ELSI. However, on 14 October, after an eventful meeting
held in Rome at the Ministry of the Budget and Planning, the parties separated whithout reaching
an agreement.
The United States Government now claims, on the basis of evidence given by Raytheon's
counsel (1°4), that the Italian Government was entirely responsible for the breakdown in negotiations
since, for unspecified «politica! reasons », it « had decided to allow IRI to take over ELSI's
assets without a creditor settlement », This is completely untrue. The negotiation of the abovementioned
agreement carne to grief not because of the Italian Government (which had no cause
to do so) but because of the creditor banks, fora very simple reason: the banks, who might have
been willing to accept so % or even 40 % and to free Raytheon from its guarantee o bligations,
realized that the ELSI assets were not enough to pay such a percentage. The assurances to the
contrary given by the Raytheon management (1°6) did nothing to change this. In fact, the Raytheon
estimates were based on the quick-sale value of the ELSI assets according to the valuation
made by the company management itself six months earlier. Already dubious at the time they
were made, these estimates were even less reliable six months later, in full bankruptcy proceedings.
On 13 November 1968 the Italian Government issued a special press communiqué that
« [w]hile the STET Group remains committed to build a new plant in Palermo for the production
of telecommunication products, the IRI-STET Group, urged by the Government, after the
examination of alternative solutions which proved unfeasible, stated its willingness to intervene
(99) Document N. 18.
(10°) See, among others, BIGIAVI, L'imprenditore occulto, Padova 1964, p. 185 et seq.; AscARELLI, Foro Italiano
(1950), I, II 14; FERRI, Le Società, Torino 1985, p. 390 et seq.
(101) See Memorial, p. 14.
(102) See Documents N. 37-39.
(103) See Memorial, Annex 46.
(104) See Memorial, Annex 2.9, p. 6.
(106) See Memorial, p. 16.
CONTROMI!MORIA DllL GOVI!RNO ITALIANO 95
in the take-over of the [ELSI] plant in the organization of new lines of production n (1°6). The
United States Government contends that the Italian Government thus interfered unduly in the
ongoing bankruptcy proceedings; by publicly announcing its intention to take over the ELSI
assets at ali costs, it was allegedly discouraging other possible bidders from competing at the
later auctions (1°7).
However, this allegation is totally unfounded. The announcement in question was made
when it was clear that there was no other way out and for the sole purpose of reassuring public
opinion in Palermo, which was understandably exasperated after months of vainly waiting for
a possible solution to the dramatic ELSI crisis. A perusal of the announcement reveals that
IRI was actually only following a definite Government directive and that the Government itself
was perfectly aware that the acquisition of the plant was a very poor bargain. This is the only
possible explanation for the initial assurance that the purchase of ELSI's plant would in no
way have jeopardized the implementation of the originai STET project to build a new plant,
also in Palermo, and for the final mention of the commitment to start up new production lines
in ELSI's plant. There was therefore no danger of discouraging other possible buyers from
bidding for the factory. After all, six months after ELSI had filed for bankruptcy (and eight
months after the announcement that it was being wound up) only two enterprises- Generai
Instruments and Compagnie Sans-Fil- had come forward and both were interested solely
in leasing the plant once it had been purchased by others. Therefore, the announcement of 13
November 1968 merely gave those concerned the certainty that the solution to the crisis was
dose at hand. In fact, the above-mentioned four auctions for the sale of the ELSI factory were
held by the receiver the following year (18 January, 22 March, 3 May, 12 July 1969) and led to
the final purchase of the plant by EL TEL.
(106) See Memoria!, Annex 47·
(107) See Memoria!, Annex 29, Exhibit +\.

PART II
THE JURISDICTION OF THE COURT
In view of Artide XXVI of the 1948 Treaty of Friendship, Commerce and Navigation
(the « Treaty ») between Italy and the United States, the Italian Government fully recognizes
the Court's jurisdiction over the dispute in so far as it relates to the interpretation and application
of the 1948 Treaty and the 1951 Supplementary Agreement.
The Italian Government respectfully calls the Court's attention to the fact that, under Artide
XXVI of the Treaty, jurisdiction only exists with regard to « any dispute between the High
Contracting Parties as to the interpretation or the application of this Treaty, which the High
Contracting Parties shall not satisfactorily adjust by diplomacy ». The provision appears to
require, as a condition for submitting a dispute unilaterally to the Court, that the basic contentions
concerning the interpretation or the application of the Treaty should have fìrst been put forward
in diplomatic negotiations. A dispute between the Parties with regard to the principal
legai issues (l) could not otherwise be held to exist.
In the « Memorandum of Law in Support of the Claim of Raytheon Company and the
Machlett Laboratories lncorporated, Against the Government of Italy in Connection with
Raytheon-Elsi S.p.A.» (2), submitted by the daimant Government, the « Summary of Legai
Arguments » (pp. 73-75) referred to Artides V, paragraph 2, VI and VII of the Treaty, Artide
I and/or paragraph 2 of the Protocol and Artides I and V of the Supplementary Agreement.
In the condusions to its Memoria!, the daimant Government no longer alleges violations of
Artide VI of the Treaty, Artide I and/or paragraph 2 of the Proctool and Artide V of the Supplementary
Agreement; on the other hand, violations of Artides III, paragraph 2, and V, paragraphs
I and 3, of the Treaty are also maintained. The latter provisions had only been referred
to during the course of the argument in the aerlier « Memorandum ».
This lack of consistency on the part of the Government of the United States with regard
to the treaty provisions which have allegedly been infringed hardly corroborates the daimant
Government's contentions based on these provisions. In respect of the Court's jurisdiction,
the Italian Government could request the Court to dedare that the conditions set forth in Artide
XXVI of the Treaty have not been fulfìlled, a t least with reference to part of the daim. However,
in the interests of a complete settlement of the present dispute, the defendant Government refrains
from putting forward any such request.
(l) Right of Passage Case, I.C.J. Reports 1957, p. 149.
(2) Unnumbered Document.

PART III
THE ADMISSIBILITY OF THE CLAIM
Tbe Italian Government respectfully submits that the United States Government's claim
is inadmissible in view of tbe fact that local remedies were not exbausted by the two United
States corporations on bebalf of whicb tbe claim is put forward.
In the well-known Ambatielos case, wbicb concerned a claim made by tbe Greek Government
against tbe United Kingdom Governinent on tbe basis of tbe bilatera! Treaty of Commerce
and Navigation of 1886, tbe. United Kingdom Government invoked tbe local remedies rule and
the. · Commission of Arbitration:
« Tbe tule tbus invoked by the United Kingdom Government is well establisbed in international
law. Nor is its existence contested by the Greek Government. lt means that tbe State
against. wbicb ·an ìnternational action · is brougbt · for ìnjuries su:ffered by private individuals · bas
tbe rigbt to resist sucb an action if tbe persons alleged to bave been injured bave not first exbausted
ali the remedies available to tbem under tbe municipallaw of that State. Tbe defendant
State bas the rigbt to demand tbat full advantage sball bave been taken of alllocal remedies before
tbe matters in dispute are taken up on tbe international leve! by tbe State of wbicb the persons
alleged to bave been injured are nationals (l) ».
Tbe local remedies rule was autboritatively defined by tbe Court in tbe Interhandel case
in the following terms:
« Tbe rule tbat local remedies must be exhausted before international proceedings may be
instituted is a well-establisbed rule of customary international law; the rule bas been generally
observed in cases in wbicb a State bas adopted tbe cause of its national wbose rigbts are claimed
to bave been disregarded in anotber State in violation of internationallaw. Before resort may
be bad to an international court in sucb a situation, it bas been considered necessary that tbe
State wbere tbe violation occurred sbould bave an opportunity to redress it by its own means,
within tbe framework of its own domestic legai system » (2).
Italy was tberefore entitled to bave an opportunity to redress the alleged violations of tbe
1948 Treaty and the 1951 Supplementary Agreement witbin tbe framework ofthe ltalian domestic
system.
In applying the local remedies rule, it is necessary to assume that tbe contentions with
regard to law and to fact, whicb bave been put forward by the applicant Government on tbe
merits of the case, are correct. In tbe words of the arbitrai award in tbe Flnnish Shipowners ·case:
" According to tbe principles approved by the Arbitrator, every relevant contention, wbetber
it is well founded or not, brought forward by the claimant Government in tbe international procedure,
must under the local remedies rule bave been investigated and adjudicated upon by tbe
bigbest competent municipal court. ... Tbe contentions to be taken into account must be considered
well founded because otherwise tbe rule that wbere recourse is futile, recourse is not required
would lead to tbe consequence, pointed out by tbe Britisb Government, tbat unmeritorious
international claims would be taken out of the · rule tbat municipal remedies must be exbausted.
But, as previously said, every relevant contention brougbt forward by tbe claimant
( 1) I 2 Reports of lnternatio11al Arbitrai Awards, pp. II 8-u9.
(2) I.C.']. Reports 1959, p. 27.
100 RASSEGNA DELL'AVVOCATURA DELLO STATO
Gouvernment in the international procedure - whether erroneous or not - must, according
to the opinion expressed by the Arbitrator, un der the local remedies rule ha ve been examined
by the municipal courts, ere the respondent State is bound to enter into further international
proceedings " (8
).
The same approach was taken by the Commission of Arbitration in the Ambatielos case :
« If the rule of exhaustion of local remedies is relied upon against the action of the claimant
State, what is the test to be applied by an international tribunal for the purpose of determining
the applicability of the rule? As the arbitrator ruled in the Finnish Shipowners case of 9th May,
I934, the only possible test is to assume the truth of the fact on which the claimant State bases
its claim » (4).
The two United States corporations on behalf of which the claim is put forward never made
use of any local remedy. The applicant Government contends that no suit for damages « could ...
have been brought under Italian law, on behalf of ELSI's shareholders, Raytheon and
Machlett " {6
).
However, the only support given to this assertion is a corresponding paragraph in an affidavit
by Mr. Giuseppe Bisconti, Raytheon's Counsel (« Annex 26 para. 28" to the Memoria!).
In the present case no provision of the Treaty or the Supplementary Agreement was ever
invoked before Italian courts. There is no doubt that the two US corporations could have clone
so. Enabling legislation had been enacted in Italy: Law N. 385 of I8 June I949 (Gazzetta
Ufficiale, N. I57 of I2 July I949, supplement) and Law N. 9IO of I August I96o (Gazzetta
Ufficiale, N. 2I3 of I September I96o), the latter with regard to the I95I Supplementary Agreement
Provisions of the Treaty had been regarded by the Italian Court of Cassation as self-executing
and applied to the benefit of United States parties which invoked them. See, for instance,
decision N. 2228 of 30 July I96o, The Durst Manufacturing Co. v. Banca Commerciale Italiana,
with reference to Artide V, paragraphe 4, of the TrE'aty {6).
In the Italian Government's view, the fact that the two United States corporations never
resorted to Italian courts, when they could have based a claim against the Italian State on the
alleged facts and on the alleged infringements of the Treaty and the Supplementary Agreement,
leads to the conclusion that the applicant Government's claim is inadmissible because local
remedies were not exhausted.
(B) .Reports of Internationa! Arbitrai Awards, p. 1503-4.
(4) 12 Reports of International Arbitrai Awards, p. I19. In the van Oosterwijck case the European Court of
Human Rights similarly held:
« The only remedies which Artide 26 of the Convention requires to be exercised are those that relate to the
breaches alleged and at the same time are available and sufficient (see the Beweer judgment of 27 February 1980,
Series A N. 35, p. 16, para. 29). In order to determine whether a remedy satisfìes these various conditions and is on
that account to be regarded as likely to provide redress for the complaints of the persons concerned, the Court does
not have to assess whether the complaints are well-founded: i t must assume this to be so,. but on a strictly provisional
basis and purely as a working hypothesis (see the arbitrationa ward of 9 May 1934 in matter of the << Finnish Shipowners
>>, United Nations Collection of Arbitration Awards, vol. III, pp. I503-1054, also citedb y the Conimission in its
decision of 17 January 1963 on the admissibility of application n. 1661 62, X and Y v. Belgium, Yearbook of the
Convention, vol. 6, p. 366). Publications of the European Court of Human Rights, Series A, vol. 40, p. 13-14 (1981).
(6) Memorial, p. 22, note n.
(6) 64 Rivista di Diritto Internationale (1961) p. II7-II8 and 84 Il Foro Italiano (1961), I-304. A similar view
appears to have been taken by United States courts. In Spiess v. Itoh & Company the US Court of Appeals for
the Fifth Circuit held that « (t)he FCN treaties, including the Japanese Treaty, are self-executing treaties, that is
they are binding domestic law of their own accord, without the need for implementing legislation &, 643 Federai
Reporter, 2d Series, p. 354 at p. 356 (1961).
PART IV
THE INTERPRETATION AND APPLICATION OF THE 1~)48 TREATYAND THE
1951 SUPPLEMENTARY AGREEMENT
I. The ~gal. terms of the. dispute .: tht!. claimant and {he deftmdant Government' s positions.
The Government of the UnitedSta1:es, at the beginning of its Memoria! of IS May 1987,
ass~rts that the case << concerns the failute · of the Government of I taly to afford to U nited States
investorS in I taly the pròtections and guarantees established by the I 948 . Treaty of. Friendship
Commerce and Navigation between. the United States of America and the Italian :Republic
(the <<Treaty ») ànd its i951 Su)?plei:rient '' (1). •
This· daimiS subséquently developed ·withreference, in particular, to Articles III, V and
VII of the 1948 Treaty, and to A11:icle I ofthe 1951 Supplemeiltary Agreement. More precisely,
the Governmerit · of the United States elaims • that « the tequisition · an d subsequent conduct
were both arbitrary and diScriminatory, prevented Raytheon and Machlett from managing and
controlling an ltalian corporationwhose shares they had lawfully acquired, and resulted in the
impàirmeilt òf their legally acquired rights ànd interests - in violation of Articles III an d VII
ofthe Treaty and Artide I of the Supplemerit. In addition, the requisition constituted a taking
of Raytheon's and Mach1ett's interests in property without due process and without adequate
compensation, in violation of Artide V of the Treaty. Italian autorities also failed to comply
with the obligation un der Artide V · to afford the f>rotection an d security, by the unwarranted
delay in ruling on the challenge to the req\lisition order and by failing to afford protection to
ELSI's plant and premises " (2).
On the contrary, the ltalian Government considers the charges concerning the behaviour
of the ltalian authorities to be unfounded, because they are based not only on an inaccurate and
biased reconstructi.on of the facts (as has been clarifìed in Part l), but also on·an incorrect interpretation
of internationallaw. It will be shown how the provisions on which the United States
Government's .daim is based should be properly undetstood and applied to the case in question.
Before doing so, however, a few considerations need to be made concerning the nature, content
and generai features of the two Treaties that tbe United States Government daims have been
violated by ltaly.
z. The rules oj interpretation to be applied with rejerènce to the I948 and I95I Treaties between
United States and Italy.
Although the 19.69 Vienna Convention on the Law of Treaties does not apply to the interpretation
of the Treaty and its Supplementary Agreenient, the rules on interpretation induded
in the Convention are to be considered as corresponding to those applicable under generai international
law. As the Inter-American Court of Human Rights stated in its Advisory Opinion
OC-3/83:
« ... the rules of interpretation set out in the Vìenna Convention ... may be deemend to state
the relevant internationallaw principles applicable to this subject" (3). Similarly, the Arbitration
(1) Memoria!, p. 3·
(2) Memoria!, pp. 3-4.
( 3) Advisory Opinion OC-3/83 of September 8, 1983, Annual Réport of the Inter-American Court of Human
Rights 1984, p. 28-29.
102 RASSEGNA DELL'AVVOCATURA DELLO STATO
Tribunal in the dispute concerning the Delimitation of the Maritime Boundm·y between Guinea
and Guinea-Bissau considered that Articles 31 and 32 of the Vienna Convention provided the
« revelant rules of international law governing the interpretation » of an 1886 treaty. The Tribuna!
referred to the « Parties' agreement on this point » and to « the practice of international
tribunals concerning the applicability of the provisions of the Convention on the Law of Treaties
by virtue of an international custom recognized by States (see in particular the Legal Consequences
for States of the Continued Presence of South Africa in Namibia case, I.C.]. Reports I97I, p. 47,.
paragraph 94; Fisheries ]urisdiction case, I.C.J. Reports 1973, p. 18 and 63, paragraph 36) » (4)
' It should be noted that, in accordance with the generai rules of interpretation set out in
Artide 31 of the above Convention «[a] treaty shall be interpreted in good faith, in accordance
with the ordinary meaning to be given to the terms of the treaty in their context and in the light
of its object and purpose » (5). This provision is expressed in such terms as to allow one to conclude
that, out of the various possible methods of interprétation, priority is given to the textual method.
This method has the advantage of being objective, precisely because it is based on the normal,
ordinary meaning of the words. The Convention gives less weight to the intention of the parties
as it appears from the preparatory works. The value of these works, according to Artide 32 of
the Convention, depends on the results of the objective method (6).
Further elements which can be drawn from the above-mentioned Artide 3 I include the
requirement that each clause of a treaty shall be interpreted in its context, taking into account
the aims pursued by the parties through the treaty as a whole. Both of the above indications
strongly emphasize the unitary character of each treaty. Therefore, it is necessary to rule out
the possibility of artificially combining individuai clauses which may suit the specific and occasionai
interest of one interpreter in a particular case. Likewise, one must also refrain from representing,
as the « object and purpose » of the whole treaty, an aim which is partial with respect
to the overall aim of a treaty, and which, moreover, is not explicitly stated, but is, at most, pursup;:,
only indirectly in the treaty (in the present case, the protection of investments).
3· The Treaty of Friendship, Commerce and Navigation of 2 February I948; its impact on the
problem of investments.
The Treaty of Friendship, Commerce and Navigation signed in Rome on 2 February
1948 between the United States of America and Italy belongs to a well-known category of bilatera!
agreements governing the treatment of aliens. Agreements of this kind aim essentially
at regulating the status of nationals of each party, as well as of legal entities and companies which
have the « nationality >> of one of the parties, by assigning to them a number of advantages and
guarantees in the other party's territory.
One of the main features of these agreements is their broad scope, which is due to the great
variety of the objectives pursued. The matters regulated include, in the first instance, a wide
range of questions referring to the establishment, in the territory of either Party, of nationals
and legal entities belonging to the other party, for the purpose of carrying on not only commerciai
and industriai activities, but also professional, culturai, scientific, religious or philanthropic
activities. It should also be noted that the benefits granted to individuals and legal entities are
not restricted to the recognition of rights with economie implications; aiso personal rights and
even certain civil rights and freedoms are covered.
( 4) See translation published in 25 lnternational Legal lYiaterials, p. 271-272 (1986). The origina! French
text refers to << La pratique des tribunaux internationaux quant à l'applicabilité des dispositions de la convention sur
le droit des traités au titre d'une coutume internationale reconnue entre Etats ( .... ) ''· See 68 Rivista di Diritto Internazionale,
p. 6o9 (1985).
(5) Emphasis added.
(6) However, the Italian Government fìnds it useful to complete the set of preparatory works (Documents
N. 3 to 17) concerning the parliamentary debates relating to the 1948 Treaty and the 1951 Supplementary Agreement-
as the claimant Government exhibited only part of the relevant documentation- both for Italy and the
United States.
CONTROMEMORIA DEL GOVERNO ITALIANO 103
Within the framework of these agreements, thè provisions goveming establishment are
followed by those conceming intemational trade and related problems of a :fiscal, customs, and
currency nature; a further set of provisions refer to navigation e).
The treaty of 2i February 1948 · between Italy and the United States corresponds to the
above mode! andis extremely complex. It lies beyond our present scope to go into its content
in detail. .· We shall merely.point out in.passing.that it is.over.twenty pages long and comprises
twenty ... se.:ven articles; many ofwhich çontaining several paragraphs .. The object and purpose
of such .a Treaty (in thelight of whiçh: it must be interpreted, in accordance with Article 3 I,
paragraph I, of 1:hè Vienna Convention on the Law of Treaties cited above) are given an appropriate
overall description in the Preamble: • « strengthening the bonds of peace an d the traditional
ties of friendship between the two countries and ( ... ) promoting closer intercourse between
their. respective. territories through· provisions responsive to the spiritual, cultural, economie
and eornmerciaLaspirati0ns oftheir peoples » •
. · In consideration of all this, one cannot agree with the Government of the United States
when · i t clairns that <t the parties' fundam:ental· intention >> was « to provi de a framework which
would · foster a favorable climate for · inves1:ment >l (8). In our view, the airn of creating le gal
conditions suitable. for investirnent wa:s only one of the numerous aims pursued in the I948
Treaty (9), It is useful to. insist on this point;. in order to oppose from the outset the tendency
emerging from the Memoria! of the claimant Government, namely to interpret ali the provisions
of the 1948 Treaty as being intended to protect. the in:vestors of each party in the territory of the
other party. This tendency does not conforrn .to .an objective .interpretation of the said provisions.
Furthermore, it would also bave the result of greatly accentuating the imbalance between
the two parties ·in view of the •· o:veJ:Whelining predominance of United States investments in
Italy o:ver. Italian investments in the Uhited States.
In this connection it should be noted that nwnerous other Treaties of Friendship, Commerce
and Na:vigation.concluded betweenthe Govemment ofthe United States and Western European
countries after World War 11 contain an explicit reference to the fostering of investment as one
of the aims pursued. This applies to the treaties with Greece, of 3 August 1951, with Denmark,
of I October 1951, with West Germany, of 29 October 1954, with the Netherlands, of 22 March
1956, with Belgium, of 21 February 1961, and with Luxembourg, of 23 February 1962. The
expression most frequently used refers to the possible contribution to the de:velopment of closer
econ01:nic and cultura} t:elations « by anangements ... pt:omoting mutually advantageous commerciai
interco~t:se and 1nvestmentu. It is noteworthy that wot:ding of this kind was not included in
the Pre;:~mble tothe. treaty signed by the United States and Italy on 2 .February 1948 •
• Our remarks con,çerning the object. and purpose of the I 948 Treaty are indirectly confìrmed
by the S\lbsequent signing of the Supplementary Agreement (Washington, 26 September 1951).
As canbe.seen from its Preamble, this Agreementactually aims at « giving added encouragement
to investments of the one country in useful undertakings in the other country >>; the contribution
it makes to this end consists in the << ampli:fication of the principles of equitable treatment set
forth in the Treaty of Friendship., Commez:ce and Navigation signed at Rome on February 2,
I948». Clearly, there .would bave be(ln no need to negotiate and sign a Supplementary Agreement
had the preçeding funcJazn,ental Treaty given sufficient weight to the speci:fic problems of in:
vestment ..
4· Recent tendencies of the United States policy for the protection of foreign investments.
A signi:ficant development needs to be recalled here. In recent years, particularly since
1982, United States policy, which had pre:viously tended to encourage the stipulation of further
(7) In generai, BLUMENWITZ, « Treaties of Friendship, Commerce and Navigation », in Encyclopaedia of Public
International Law, Inst. 7, 1984, p. 484 et seq.
(8) Memoria!, p. 27.
(9) In this regard, WALKER « Treaties for the Encouragement and Protection of Foreign lnvestment: Present
US Practice », in American Journal of Comparative Law, 1956, p. 239) says that ~ the FNC Treaty is not a specialinterest
vehicle, but rather one into which investor requirements, with scarcely an express reference to investments,
are fitted as integrai parts for a larger regulation of private affairs in international relations ».
104 RASSEGNA DELL'AVVOCATURA DELLO STATO
Treaties of Friendship, Commerce and Navigation (many of which were negotiated after World
War II), underwent a change. Preference began to be given to a more limited, but more effective,
instrument for regulating relations with countries with heavy United States investments,
namely bìlateral Investment Treaties. This new type of agreement had already been tried out
in the seventies with reference to relations between a number of European countries and several
developing countries. The United States ultimately saw the merits of the new approach and
followed it in the case of a number of countries (starting with Egypt and Panama). An attempt
was made by the Investments Bureau of the State Department to draft a model investment
treaty (10).
Two remarks need to be made in this connection. Firstly, the change in the United States
attitude and the reasons for such a change are indicative of the objective limitations of the suitability
of Treaties of Friendship, Commerce and Navigation as a means for protecting investments.
l t has been rightly said that these treaties were « intended to protect American citizens
abroad, rather than private foreign investments » (11). In our opinion, when doubts arise as to
the scope of certain provisions contained in the 1948 Treaty between Italy and the United States,
this factor should not be underrated. It should also be noted, again in connection with Treaties
of Friendship, Commerce and Navigation, that « the attempt to address very complex issues
in the context of a broad spectrum of relations detracted from the utility of the FCN (treaties)
as an investment protection device » (12).
This accurate remark can hardly be reconciled with the attempt by the daimant Government
to make out that Treaties of Friendship, Commerce and Navigation are basically the
equivalent of investment treaties (13).
Secondly, the differences between the two types of agreement we are comparing must
necessarily have repercussions on their interpretation. From the point of view of the Government
of the United States, each of the provisions in the 1948 Treaty to which it refers is merely
a part of a complex regulatory design aimed at protecting investments. This view must bee hallenged.
The approach chosen by the daimant Government distorts the global nature of the
Treaty.
5· The principles on which the I948 Treaty,is based.
One of the fundamental characteristics of the 1948 Treaty, which is rightly emphasized in
its Preamble, is the fact that it is << based in generai upon the principles of national and of mostfavored-
nation treatment in the unconditional form ». Perusal of the individuai provisions of
the Treaty reveals that the two standards are both referred to in some artides (e.g. Artide l,
paragraphs 2 and 3), while reference to only one standard is made in others (e.g. Artide IV,
which merely provides for the most-favored-nation treatment in the case of exploitation of
minerai resources).
When the Treaty was signed, the liberai spirit with which the principle of national treatment
had been adopted was hailed by a distinguished member of the United States administration.
During the hearing of 30 Aprii 1948 before a subcommittee of the Committee on Foreign
Relations of the US Senate, Mr. Thomas Blaisdell, assistant to the Secretary of Commerce for
lnternational Trade, made the following dedaration: << The Treaty represents acceptance by
republican Italy of a number of democratic principles in trade and navigation. The national treatment
accorded to corporations, for example, is the most liberai ever specified in any treaty entered
into by the United States » (14).
(10) BLUMENWITZ, op. cit., p. 489, mentions a << declining relevance » of the Treaties of Friendship, Commerce
and Navigation ».
(11) BERGMAN, «Bilatera! lnvestment Protection Treaties: An Examination of the Evolution and Significance
of the US Prototype Treaty », New York 'Journal of International Law and Politics, 1982, p. 7·
. (12) BERGMAN, op. cit., loc. cit.
(18) Memoria!, pp.27-28, notes.
(14) See Document N. 15.
(15) BERGMAN, op. cit., page 20.
CONTROMBMORIA DBL GOVERNO ITALIANO 105
Clearly, both the national treatment.and the most-favored nation standards take on a concrete
and precise meaning through the ascertainment respectively of the conditions applying to
the citizens (and thus of the municipal legislation governing them) and of those applying to
third countries and theh: citizens (under the agreements concluded with those countries) with
regard to a given matter, Therefore both clauses have been called « relative » (15). Everything
depends on the point of view adopted. in a single case, that of one or other of the contracting
States, and on the type of treatment referred to. In this connection it should be noted that,
when: speaking of« treatment » one cannot take into account only the advantages that are implied;
in ali matters, the overall treatment of aliens is an inseparable whole made up of advantages and
disadvantages. If one considers, in particular, the concept of << national treatment » on the basis
ofthis standard, ofie cannot avoid recognizing that an alien possesses certain rights and related
obligations. which are commensurate with the rights and obligations pertaining to the local
State's nationals .in the matter in question. Although the most-favored-nation treatment 411-
plies the more favorable treatment between those enjoyed and enjoyable by a third Country
(or by one of its nationals), it is necessary to compare the severa! legai systems in their entirety
even for the purpose of assessing.the applicable treatment.
6. The formula «in conformity with the laws and regulations in force» in the I948 Treaty.
Analysis of the 1948 Treaty also shows, that in regulating a given matter, the principle of
national treatment, or that of the most-'favored · nation, is often accompanied by a specific provision
according to which the enjoynl.ent or the exercise of rights by citizens of each party are
ensured «in cdtiformity with the applicablelaws and regulations ». When such a clause is included
in the text of a provision granting national treatment, it reinforces the concept defined above
according to which foreigners do enjoy rights but are also bound to respect the duties imposed
on the citizens by the laws of the country. ln other words, the respect of the set of locallaws
and regulations is a limit that cannot be overstepped by virtue of a condition granted to foreigriers
« protected » by a Treaty of Friendship, Commerce and Navigation.
This appears quite reasonable and corresponds to a situation in which the alien benefiting
from national treatment firids himself, quite apart from the specification of conformity with
the applicable laws andregulations. A foreigner cannot be considered to have a privileged position
vis-a-vis a citizen of the local State when the national-treatment principle is applied. When
the above-mentioned specification is contained in a provision whiCh grants the most-favorednation
treatment, the limitation set on the treatment of the foreigner consists in· not granting
him the favorable condition ensured to the citizens of a third country, should this not be compatible
with the municipal legislation or regulations (16}.
With regard to the principles laid down in the 1948 Treaty, i t must be observed that the
claimant Government makes occasionai references to a notion of fair treatment, to which the
status of an autonomous principle seems to be attributed. In fact, it is in the Preamble to the
1951 Supplementary Agreement that the « principles » (and not the principle) of « equitable treatment
>> stated in the 1948 Treaty are mentioned, and it is asserted that their amplification should
contribute to encouraging investments further. But when Artide I to XIII of the. 1948 Treaty,
i.e. the only clauses dealing with establishment and the only ones partially applicable also to
questìons of investments, are examined thoroughly, the only. principles repeatedly used appear
to be those of national treatment and of most-favored-natìon treatment. The fact is that no fairtreatment
principle is actually stated in the 1948 Treaty.
(16) According to an author quoted in the US Governrnent Memoria! (p. 29, note 3) whose opinion seems
therefore to be shared by the claimant Governrnent, the phrase'in conformity with applicable laws and regulations'
as it occurs in this Treaty, « is frameèl in such a manner as to imply that it does not constitute a reservation detractÌng
from the Treaty right ;, (WALKER, « Provision on Companies in United States Commercia! Treaties », in American
Journal of International Law, 1956, p. 784, note 53). The above-mentioned phrase is not altogether clear. In our
opinion the question is not that of the detraction of something from a treaty right. What happens is simply that
the Treaty acknowledges some rights only to the extent to which they are in conformity with the laws and regulations
of the !oca! State.
106 RASSEGNA DELL'AVVOCATURA DELLO STATO
This becomes ali the more significant in view of the fact that an obligation to ensure « equitable
treatment » (to the persons, property, enterprises and other interests of nationals and companies
of the other party) is laid down explicity in the Treaties of Friendship, Commerce and Navigation
entered into by the United States with Ireland, Denmark, Greece, Belgium and Luxemburg.
Some other treaties, particularly those conduded with Germany and the Netherlands,
speak of << fair and equitable treatment » to be accorded by the parties to the above-mentioned
beneficiaries.
Therefore, the reference to the « principles of equitable treatment » contained in the Preamble
to the 1951 Supplementary Agreement can only mean that the parties thereto wished to express
their intention to go beyond the two principles contained in the basic 1948 Treaty, the value
an d function of which have been expressed in the « equitable treatment » formula. In other words,
the principles of national and of most-favored-nation treatment are both considered to be « principles
of equitable treatment J>. However, there is no separate fair treatment principle to which
the other two are added. At most it may be daimed that Artide I of the Supplementary Agreement
implicitly grants equitable treatment to its beneficiaries insofar as i t forbids subjecting the
citizens and legai entities of either party to arbitrary and discriminatory measures within the
territory of the other party.
7· The Status of corporations, in the same Treaty (Article II, paragraph 2).
Another generai problem solved by the 1948 Treaty, and the solution of which of course
retains its validity in relation to the 1951 Supplementary Agreement, is that of the status of legal
entities. It is a weli known fact that, in ali Treaties of Friendship,Commerce and Navigation,
the category of persons who are entitled to benefit from the protection provided by every treaty
consists, in the first instance, of individuals who are nationals of either party to the agreement.
These individuals are protected insofar as they are present or carry on activities within the territory
of the party other than the one of which they are citizens. A second category consists of
legai entities; with regard to the latter, each treaty establishes the criteria according to which
they are said to belong to one or other of the parties to the agreement, and consequently recognizes
the right of legal entities belonging to one State to enjoy the advantages granted under
the treaty within the territory of the other State.
Artide II, paragraph 1, of the Treaty signed between ltaly and the United States on 2 February
1948 gives a broad definition of the term « corporations and associations ». In particular,
it indudes among the latter ali « corporations, companies, partnerships and other associations,
whether or not with limited liability and whether or not for pecuniary profit, which may have
been or may hereafter be created under the applicable laws and regulations J>. Paragraph 2 goes
on to lay down that « [c]orporations and associations created or organized under the applicable
laws and regulations within the territories of either High Contracting Party shali be deemed
to be corporations and associations of such High Contracting Party and shall have their juridical
status recognized within the territories of the other High Contracting Party whether or not they
have a permanent establishment, branch or agency therein ».
In order to belong to either party, according to Artide Il, paragraph 2, of the 1948 Treaty,
what is therefore required is that the creation (or organization) of a legai entity takes piace in
accordance with the applicable legislation in the respective territories. The Treaty has adopted
the criterion of nationality (if one intends to use this term) which is based on the piace of origin
of each legal entity.
There is no provisions either in the Treaty or in its Supplementary Agreement to the effect
that a High Contracting Party may daim that a corporation which was not << created or organized
under the applicable laws and regulations » within its territory is nevertheless a company of the
same party. As was stated in the brief for the United States as Amicus Curiae in Sumitomo v.
Avigliano with regard to the similar wording of the Treaty of Friendship and Commerce between
the United States and Japan, the treaty << provision makes dear that a company has the nationality
of its place of incorporation » (17). The brief ran as foliows: « The simple place-of-incorporation
(17) 21 International Legal Materials, p. 630 (1982).
CONTROMEMORIA DEL GOVERNO ITALIANO 107
standard in the FCN treaties was a deliberate departure from other tests of corporate nationality -
induding a contro! test of the sort adopted by the court of appeals - that were followed or
suggested in other situations during the proceeding severa! decades (W ALKER, supra, so American
J ournal of International Law at 38I). Moreover; the intent of the parties that a company's nationality
would not be determined by the nationality of its owners is reinforced by other provisions
of the treaty that distinguish between nationals and companies of a party and enterprises owned
or controlled by such nationals and companies >> (18).
This argument was accepted by the Supreme Court of the United States, which applied
it to the case in hand in the following terms: « Sumitomo is 'constituted under the applicable
laws and regulations 'of New York; based on Artide XXII, para. 3, it is a company of the United
States, not a company of Japan. As a company of the United States operating in the United
States, under the literallanguage of Artide XXII, para. 3 of the treaty, Sumitomo cannot invoke
the rights provided in Artide VIII, para. I, which are available only to companies of Japan
operating in the United States and to companies of the United States operating in Japan » (19).
From the above-mentioned Artide II, paragraph 2, in the case in hand it may be inferred
that Raytheon and Machlett, which are companies of the United States, are beneficiaries of the
protection afforded under the Treaty with regard to their activities in Italy (or, more in generai,
to the situations having arisen in Italy and which concem them directly), while ELSI, which
without any doubt a company of Italy, is not induded among the beneficiaries of protection
under the Treaty with regard to its activities in Italy, or in situations relating to them which
have occurred in ltaly (e.g. the requisition of its plant, the result of a decree which was addressed
to ELSI).
8. Provisions of the Treaty protecting activities and goods which formally belong to persons of the
local State.
As a generai rule, the Treaty and the Supplementary Agreement protect the physical persons
and legai entities of one contracting State solely as far as activities carried on and property
directly held in the other contracting State are concerned. However, there are a few provisions
which, as well as according protection to such activities and property, also provide protection
for certain property that, although formally belonging to a physical person or legai entity of the
local State, are substantially activities and proprety belonging to persons of the other State.
For example, Artide V, paragraph 3, of the Treaty, after granting the nationals, corporations
and associations of one contracting party both national and the most-favored-nation treatments
within the territory of the other contracting State for the purposes of the matters enumerated
in paragraphs I and 2 of the same artide, makes the following further provision: « Moreover
in ali matters relating to the taking of privately owned enterprises into public ownership and the,
placing of such enterprises under public contro!, enterprises in which nationals, corporations and
associations of either High Contracting Party have a substantial interest, shall be accorded, within
the territories of the other High Contracting Party, treatment no less favorable than that which
is or may hereafter be accorded to similar entreprises in which nationals, corporations and associations
of such other High Contracting Party have a substantial interest, and no less favorable
than that which is or may hereafter be accorded to similar enterprises in which nationals, corporations
and associations of any third country have a substantial interest ».
The structures of Artide III, paragraph I, second sentence, and Artide III, paragraph 2,
second sentence are quite similar.
The existence of the above-mentioned provisions can be explained by recalling that there
are frequent cases in present-day economie life of companies set up in one country and in accord-
(18) Ibidem., at p. 634.
(19) 102 Supreme Court Reporter 2374 (1982); 21 lnternational Legai Materials, p. 791 et seq., p. 794
(1982). Article XXII, para. 3 of the Treaty between the United States and Japan, which corresponds to Article
II, para. 2 of the Treaty with Ita!y, reads as follows: « Companies constituted under the applicable laws an d regulations
within the territories of either Party shall be deemed companies thereof >>. Article VIII, para. I confers rights
~n « nationals and companies of either Party ... within the territories of the other Party *·
108 RASSEGNA DELL'AVVOCATURA DELLO STATO
ance with its laws expanding their activities to other countries, different from that of their
origin, by means of other companies controlled by them. The latter can be set up by the « parent »
company, or companies may become « parent » cqmpanies by buying up the majority of the
foreign company's share (these occurred in the case of Raytheon and ELSI).
Legally, it must be observed that, in any case, the controlling and the controlled company
remain two distinct entities, i.e. two subjects which can, and in the present case actually do,
have different nationalities.
The phenomenon described as the subordination of one company to another may lead to
various consequences in Treaties of Friendship, Commerce and Navigation. Theoretically,
the Contracting States could solve the question of the nationality of a controlled company by
means of a clause in which the latter is deemed to belong to the national State of the controlling
company (or << parent » company). However, this type of solution is not envisaged in the 1948
Treaty between Italy and the United States. It was decided instead to make the nationality
depend on the State of origin and to include ad hoc provisions in order to give a certain limited
importance to the fact of the control being exerted by a company belonging to the other contracting
State. However, this has three consequences, about which there seems to be no doubt:
firstly, the controlled company retains its nationality, in accordance with Artide Il, and this
must be taken into account when applying all the provisions of the Treaty which do not have
the special nature of the abovè mentioned provisions contained in Articles III and V; secondly,
the link betwee:q. parent company and controlled company, which certainly exists at the level of
economie interests, does not allow of any identification between the two when it comes to interpreting
the Treaty; thirdly, the avobe mentioned provisions must be given a restrictive interpretatation
because any exceptional rule must be interpreted narrowly; it is therefore not possible
to expect that the phenomenon of control by a foreign company over a national company has
any itnpact beyond the situations provided for specifically in Articles III and V.
9· Alleged violations of Article V of the I948 Treaty ...
Let us examine the individuai provisions of the 1948 Treaty and the 1951 Supplementary
Agreement on which the United States has based its claim. It will be shown that, in the first
piace, Articles V and VII of the Treaty are almost entirely irrelevant to the case in hand, and,
in the second place, Artide III of the Treaty, and Artide I of the Supplementary Agreement,
when interpreted correctly, do not support the contentions of the claimant Government.
Artide V concerns the << protection and security » of the persons and property belonging to
nationals of each contracting party within the territory of the other party. Paragraph 1 makes
it clear that the term << nationals » is to be understood as including corporations and associations
insofar as the provision set out in the same paragraph is << applicable in relation to property »,
Paragraph 2, which deals with a particular aspect of the protection and security of property,
lays down that << [t]he property of nationals, corporations and associations of either High Contracting
Party shall not be taken within the territories of the other High Contracting Party without
due process of law and without the prompt payment of just and effective compensation ». The
same provisions give those receiving such compensation the right to withdraw it << without interference
», with entitlement to foreign currency and with exemption from any tax for transfer
or remittance. Lastly, paragraph 3 ensures that treatment no less favorable than national or
most-favored nation treatment will be extended to enterprises in which nationals and corporations
of each contracting party have a substantial interest whenever, within the territories of
the other contracting party, the enterprise is transferred from private to public ownership or
the enterprise is transferred to public ,control.
The Government of the United States contends that Artide V, paragraph 2, was violated
by the Italian Government when it requisitioned the ELSI plant. In its opinion, the << guarantee
of compensation » is extended by the Protocol attached to the Treaty << to interests held directly
or indirectly by nationals, corporations and associations of either High Contracting Party in property
which is taken within the territories of the other High Contracting Party » (<< in other words »,
it is claimed at p. 41 of the Memorial submitted by the Government of the United States,
<< the Treaty unambiguously protects the investment interests of United States shareholders in
109
Italian companies whose property is taken by the ··lt~ian Gov~rnrnent '' ); ·. Lastly, ·• Article v,
paragraph r, .is alleged to have. been··vìolated because the.·It~ian;Government supposedly did
n<lt pr~;~tect the ELSI plant after the req1J:isition; . furthermore; paragraphs I and 3 o:f the same
Artide are dèeriied to have been violated at the · same time• owing to the delay with which the
Prefect decidect <>n the appeal against the requisiti<m.
. . .·.·.··· 1-e~ .. \ls. hegip .. frol:ll .. thtJ:.lAAt .. two.·P~dNs·;··•···'l'l!e Pfelimmaey. rernark.~p,·he ~de•of" .tll~·· çl11~ant
GovertlJ:tlen(s cq4tention is. tlliltJhe pròblem of the protection of. the . ELSI p1~nt, · as well as
····m~ .. ~h~~h··~La~:Jlr~~ti,.•:i~èu~h~tttst~~e:~!e~:~dt~t!6:iài4~~·~;;;:r1g~:~h: . iCj;
· gy:arantées t11e protection àJi<i ìSèi<:4tity ofpr()p~rtybel()nging to Unitect Stàt(;lSi•·companieSi ìn
.· I~y; Whilé tM plaht tl1at accordirtg to the Govériiìnent òf the United • States should bave been
piòteèteci uJ;:tctet tb.e Treaty belonged to tl'te ltalian company ELS[ · 1Vt<>reoV'èil\ also the · Pref~
ctrs 4ecisìt\n og tbe i;J;ppe!l~ ag~irtst tll:e Jtéquisi#on> tog~ther. with · the l.Vt~y9r's decree were ae-
!h~V~Th~~sè~~g!··~~~!;~J~it(t:!~~d~;~~t~~~~~:~ ·we:l•.!t~~~::~;~";L~~~··.~~
~~~--]~!~:::~=~~;~ would bave it, and thatthe attittidéofthew6rkerserttailed M .risk forthe p1ari:taftet the<decree
issued J:>y JJ:!.e l\1ayol,' o~ P#ti!!tl'l:o, espeçi~Ht 'M .the .lVIayor. had aJ?i?~hl,~écl two representatives
to ètisure thaftlt,eordets ìssuedwitha 'tiew to theiriàrtagement of•the factocy wete tespected.
J\deqi:fate darifìcatioris bave beèri gi'ven with re~ard t6 the ea~ses and e.ffects of the delay wìth
whìCh the Prefect decictéd uport the appeal •. ·• In itilY case ìt must absolutely be ruled out that :this
delay has any oonnection with the allegéd violàtiori ~~ pàragraph$ · x an d 3 · of Artide V;
x:-.o •/·..·. .•·. . Q·.· nd ..o f·. t.he. .P· rot.·o.·.·é oÌ.a.n n··.e· .x.e.·d . t.o th.:>e· ·· T.r·e a··.t·.y . ·· .
.. ·. · •· •• WJth regard to the idleged violation of Artide •V ,· patagraph z; it must be pointed ·o ut that
thì$ pJ;ovision accòrds, in the iocid . State, proteetion agairistthé taking of propercy an d· provides
for ~oriiperisation to ?e Pl:lid fòr ljfcipel:tf' bélo!lgitlg' tò . natiòl)~Isr corporations • or associ!l,tiotis
of thé other contracting parey. H is truè that paragraph l ofthe Prbtocol specifies that this protectiori.
ìs lilfforded idso to « inteie8ts h~ld directly or indìrectly by nationals; cotporations and associati()
ns M' either. High Col:ltractllig Party ». However, this: does not rnean that tb.e same protection
is to be generally grantedas for property beion~ing to nationals of the other 'Contractitig party
idso to. ptoperty pertaining to a· com~atiy whi~h • belongs; un der the terms of · the Treacy, . to · the
Ioc~l ~tiite · ;u1d · is conttolled lW a con1pany. belonging to the othér State. Only exceptionidly
a'i'(i sorl):è Treiity provìsions intehdéd to this effect (supra; paràgtaph 8) an d a· different Ianguligé
is lisèd: .·.. · · · · · · · · ·
Furthermorè, under paragraph i of the Prototol, protection ìs accorded only to rìghts to
propercy, While the I:talian text refers only to << rights »· (diritti) the term used in the English
text is <dnterests >>. According to Arti.cle 3.3, paragraph 4 of the Vienna Conventi<>n on the Law
<>fTreaties, the provisi<>ns dtli~Wtl: u.p in two e.qpally au.thent~c langu.ages are to be interp.reted
in such a way as to reconcile the meaning of the two texts and theteforeoin this case, in the more
restrictive · senstf of the Italiiin • text.
· A further obsécyat~on, . #hich · is ctecìsive i#Jtself; amounts t!) .<ien'Ylr)g tl:le applicability. ()f
both the ProtocoLand Article V, paragraph 2, in the present case, foro. the.simple reason that no
expropriation or << taking of property li òccurred; ··.A temporary requisition • decree was issued with
the effect of blodcing th:e ayailabìlìty of thé EL$ l plmtt for siX months and th:erefore of partially
suspending the conipany's managentent functl()ns, but only as far as that particular plant
was concerned. On the other hand, the.Mùnicìpidity of.Palermo gained nothing at the company's
(20) Memorial, p. 44•
110 RASSEGNA DELL'AVVOCATURA DELLO STATO
expense. Thus, it must be ruled out completely that the requisition decreed by the Mayor of
Palermo can be considered an expropriation measure. The Italian text expressly refers to expropriated
property (beni espropriati). In fact, Artide V of the Treaty covers completely different
situàtions from that which actually occurred (21).
II. Interpretation and application of Article VII of the Treaty.
We shall now examine the problems raised by the interpretation and application of Artide
VII of the I948 Treaty. In paragraph I, which seems to be the one to have mainly attracted
the attention of the United States Government, this Artide accords to the nationals, corporations
and associations of each contracting party, the right to « acquire, own and dispose of »
immovable property or interests therein within the territories of the other contracting party;
for corporations of United States nationality the conditions are commensurate with the treatment
accorded to Italian corporations in the United States state of origin, and in any case do
not imply more extensive rights than those granted to legai persons in Italy. The fact that this
provision indudes a principle of the free availability of immovable property is interpreted by
the Government of the United States in the sense that the Italian Government should have
been under an obligations to respect the decisions of the ELSI management concerning the
voluntary liquidation of the company and should not have requisitioned the ELSI plant, since
the requisition allegedly prevented « the owners » from disposing of the plant; in any case, the
requisition should have been followed by the payment of compensation.
Once again the fìrst objection is that the plant belonged to ELSI, that is to an Italian company.
The above mentioned Artide VII applied to the situation to which the dispute relates,
could only ensure the free availability to Raytheon and Machlett of the ELSI shares which
belonged to them (an availability about which nobody has cast any doubts). Supposing the two
United States companies were truly the owners of the plant requisitioned, the decree of the Mayor
of Palermo would not have had any effect since it was addressed to ELSI.
There are, moreover, other objections to be made. It is hard to see how the respect of a
company's decision concerning its own liquidation can be confused with the only rights which
unquestionably pertained to Raytheon and Machlett: their rights as shareholders of ELSI.
It is hard to see how, in order to leave a company free to implement its own voluntary winding
up, the Italian authorities should have refrained from requisitioning its plant: without doubt,
such an argument would be inconceivable with reference to an Italian company, since a requisition
decree referring to certain company property can legitimately be enforced even if the company
1s being wound up. In this connection i t is worth pointing out that the above-mentioned
Artide VII, paragraph I, explicitly exdudes the possibility of United States companies having
more extensive rights than those accorded by the Italian legislation to national companies in
ltaly. Lastly, it is worth repeating what has already been noted with regard to the requisition,
i.e. that it only temporarily blocked the availability of part of ELSI property. Compensation
was not eventually paid simply because it was replaced by the damages paid to the requisitioned
party (22), as was explained in Part I.
(21) In note 4 at p. 45, the United States Government's Memoria! quotes a number of awards delivered
by the Iran-United States Claims Tribuna! during the years I98I-I986 and tries to demonstrate that interference
with an alien's property may amount to expropriation, even though the !oca! State denies to have adopted such a
measure, and notwithstanding the fact that the legai title to the property formally remains with the owner, the essential
condition being that the foreign investor • has no reasonable prospect of regaining management and contro! ~.
The application of this doctrine to our case depends on the assumption that • the Government of Italy physically
seized ELSI's property with the object and effect of ending Raytheon and Machlett's management and contro!,
in order to prevent them from conducting the planned liquidation ~. Furthermore, according to the alleged indications
of ' ltalian officials ~ the requisition was going to be extended beyond its six-month term, while IRI was
completing its arrangements for acquiring ELSI's assets: that is why Raytheon and Machlett had no reasonable
prospect of ever recovering management and contro! of ELSI. Whatever the merits of the claimant Government's
contentions in law, the assumption mentioned above is firmly denied by the Italian Government: ELSI's property
was partially requisitioned for the reasons stated in Part I of this Counter-Memorial, with no intention of ending
Raytheon and Machlett management and contro!. Their end was actually the result of the bankruptcy proceedings,
open at the request of the ELSI management.
(22) In this explicit sense, see Court of Appeal of Palermo, Memoria!, Annex 8x.
CONTROMEMORIA DEL GOVERNO ITALIANO 111
I2. Evaluation of the problems raised by Article III of the Treaty.
The provisions of the 1948 Treaty and the 1951 Supplementary Agreement on which the
Government of the United States seems mainly to have based its case are Artide III of the Treaty
and Artide I of the Supplementary Agreement. Attention will now be addressed to these provisions.
The content of Artide III is rather complex. The fìrst paragraph begins by guaranteeing
that the nationals, corporations and associations of each contracting State will have « rights and
privileges with respect to the organization of and participation in corporations and associations »
within the territory of the other contracting State, in accordance with the applicable laws and
regulations of the local State and benefìting from the most-favored-nation treatment. In the
case in point nobody has challenged the right of Raytheon and Machlett to have a right of participation
in the Italian company ELSI. There is no disagreement on this between the Parties
in the present proceedings. Artide III, paragraph r, then goes on to acknowledge that the corporations
and associations of each contracting Party in which nationals, corporations and associations
of the other Party participate and which are controlled by the latter subjects, « shall be
permitted to exercise the functions for which they are created or organized in conformity with
the applicable laws and regulations », enjoying the most-favored-nation treatment.
The daimant Govemment contends that the fìrst sentence of paragraph 2 of Artide III
has been violated. This provision ensures the right of nationals, corporations and associations
of each contracting party to « organize, contro! and manage " corporations and associations of
the other contracting party << in conformity with the applicable laws and regulations " within
the territories of the latter party. According to the Govemment of the United States the provision
summarized above gives the United States shareholders, in a position to contro! an Italian
company, <<a guarantee of non-interference with management and control" (23). Furthermore,
the Italian Government is accused of having exerted undue influence on the management through
the requisition decree.
Both these contentions have to be challenged. In the fìrst piace, the requisition decree in
no way affected contro! by the shareholders over the company. It merely concemed the management
by the company of some property belonging to the said company. The right to contro!
and manage certain « local >> companies is not subject to unlimited guarantee, as the powers granted
by law to the local authorities are thereby unaffected.
More exactly, with reference to the case in hand, it should be noted that there can be no
violation of the Treaty in the case of a requisition decree based on a La w (la w N. 2248 of
20 March I865, Annex E, Artide 7, previously cited in Part l). This represents the logica! consequence
of the principle of << conformity with the applicable laws and regulations ,, which is
explicitly asserted in Artide III, paragraph 2. The possibility of requisitioning private property
<< because of grave public necessity " is, in fact, one of the cases provided for in Italian legislation
concerning the unavailability of a plant for reasons of public interest. Moreover, it should not
be overlooked that the Mayor's decree had the effect of determining only temporary unavailability
of the ELSI plant.
Moreover, the fact that the requisition decree issued in the case in point was subsequently
dedared to be invalid does not transform it into a manifestation of undue interference by the
Italian authorities. Until it expires or is overruled, a decree is to be considered legitimate and
effective. In this connection, it should be recalled that the Prefect acknowledged as a point of
law that was << undisputed, in case-law and legai doctrine, that the Public Adrninistration is empowered
under the above mentioned Artide 7 to dispose of the private property whenever
necessity exists to face a situation of actual and imminent danger for the public interest (public
health, public order, etc ... ) ... >>. The Prefect likewise acknowledged the Mayor's power to issue
requisition decree on his own initiative.
One point which deserves special attention is related to the nature of the consequences of
the requisition decree. It transferred in no way the ownership of the ELSI plant to the Mu-
(23) Memoria!, p. 30.
112 RASSEGNA DELL'AVVOCATURA DELLO STATO
nicipality of Palermo. It only partially suspended the exercise of control and management by the
company, with reference to the requisitioned property alone. In fact, by I Aprii 1968, the ELSI
Board of Directors had already decided in complete freedom to cease production and to liquidate
the assets. Furthermore, after the requisition, the Company was able to take an extremely important
decision for its future, namely to file for bankruptcy. Only after this decision and because
of it, did ELSI management definitely lose control and management of the company
assets.
13. Article I of the I95I Supplementary Agreement: was the requisition and « arbitrary » measure?
Let us now examine Artide I of the 1951 Supplementary Agreement. It prohibits subjecting
the nationals, corporations and associations of each contracting party, in the territories
of the other party, to « arbitrary or discriminatory measures » having, in particular, one of the
following effects: « (a) preventing their effective control and management of enterprises which
they ha ve been permitted to establish or acquire therein, or (b) impairing their other legally acquired
rights or interests in such entreprises or in the investments which they have made » in
various forms, induding in particular the contribution of funds through loans or shares.
In the present case,· the Government of the United States daims that the requisition of the
ELSI plant decreed by the Mayor of Palermo represented an arbitrary and discriminatory measure
such as to prevent the United States companies Raytheon and Machlett from maintaining
the effective control and management of ELSI. lnasmuch as it is responsible for the requisition
decree, the Italian Government is thus alleged to have violated the above mentioned Artide I
of the 1951 Agreement.
The first objection to be raised to this contention is related to our previous remarks concerning
Artide V, paragraph 2, of the 1948 Treaty. In the present connection, it must be said again
that the requisition decree was addressed to the ltalian company ELSI; the United States companies
Raytheon and Machlett were not actually subjected to any measures affecting their property.
l t is also worth repeating that the above-mentioned two United States companies, which
were shareholders of ELSI, never actually lost control or management of the company: the
company organs, through which this control and management were performed, were able to function
freely also during the period of the requisition, as they were merely deprived (for six months)
of the availability of the plant. One may refer in this context to the decision to file for bankruptcy,
already mentioned above, which was taken after the requisition.
There is a second objection, which would stili be valid even on the assumption that the decree
of the Mayor of Palermo directly affected Raytheon an d Machlett: the requisiti o n of the
ELSI plant cannot be defined either as an arbitrary measure or as a discriminatory measure.
· In generai, an « arbitrary » measure is defined as a measure which is completely lacking in
justificatiòn, and which can be explained only as a tool used by the public authorities to damage
and oppressa private citizen. In most Treaties of Friendship, Commerce and Navigation
entered into by the United States after World War Il, a prohibition sixnilar to the one contained
in the above mentioned Artide I of the 1951 Supplementary Agreement is placed on any «unreasonable
or discriminatory measures that would impair the legally acquired rights or interests
of nationals an d companies of the other Party in the enterprises which they have established » (24).
Each party is therefore prohibited from taking measures detrimental to the rights or interests
of the citizens and companies of the other party, whenever those measures can be defined as
unreasonable; in other words, whenever no possibility exists of identifying an adxnissible reason
on the basis of which public authorities have the power to limit those rights or interests.
lndeed, the way in which the Government of the United States represents the requisition
decreed by the Mayor of Palermo against the ELSI company appears similar to an act corresponding
to the model of arbitrary or unreasonable measures described above: suffice i t to menti o n
(24) See artide V of the Treaty with Ireland (21 January 1950) and likewise Artide VIII of the Treaty with
Greece (3 August 1951), V of the Treaty with the Federai Republic of Germany (29 October 1954), VII of the
Treaty with the Netherlands (22 March 1956), IV of the Treaty with Belgium (21 February 1961}, IV of the
Treaty with Luxambourg (23 February 1962).
CONTROMEMORIA DEL GOVERNO ITALIANO 113
that, on page 33 of the Memorial submitted by the United States Government, it is daimed,
among other things, that the purpose of the requisition was « to prevent Raytheon and Machlett
from protecting their investment ». But a perusal of the requisition decree issued on I Aprii
1968 reveals that it was based on two undeniable facts: ELSI, having decided to dose down its
plant and dismiss about one thousand of its employees, had create a serious social and economie
problem, and the reactions by the employees and the trade unions, with the hacking of public
opinion, were such as to create fears of « disturbances of public order ». In the light of these
facts - the exact analysis of which has been carried out in the preceding pages containing a
correct reconstruction of events (Part l) - the Mayor of Palermo was of the opinion that the
« features of serious public necessity and urgency » required by law in order to proceed with a
requisition actually existed. His decree can therefore in no way be said to be arbitrary.
The Memorial bases its argument on the decision of the Prefect of Palermo to set aside the
Mayor's decree and merely quotes a passage taken from that decision in which the requisition
is held to be «destitute of any juridical cause which may justify it or make it enforceable» (25
). The
Prefect in fact stated: « Therefore, the order is destitute of any juridical cause which may justify
it and make i t enforceable » (2 6). However, this passage is only the conclusion of an argument,
as can be seen from the following words: « There is no doubt that the goal to which the requisition
was directed could not be actually achieved by the order, even though - in theory - in the
case in point, the grounds of the grave public necessity and of the emergency and urgency which
caused the issuance of the order may be held to be existing. This is proved by the fact that the
activity of the company was neither resumed, neither might it be resumed ». In other words,
the requisition decree was deemed illegitimate and set aside, certainly not because it was arbitrary
- indeed, the Prefect acknowledged that, « in theory », the decree respected the conditions
of necessity and urgency - but because the purpose of the resumption of activity by the company
« could not be actually achieved » in this way. The Prefect's decision went on to criticize
the Mayor for not having taken account of the fact that « the state of the company was such, for
reasons of an economie and functional nature, as well as for market reasons, that its activity could
be continued only after action by the management to solve the company's fìnancial and industriai
problems ».
The decision to set aside the requisition decree therefore contained no statement that it
was « arbitrary », as the claimant Government is attempting to make out in the present case.
What was stated, essentially, is that the decree was not suitable for achieving its purpose of getting
the ELSI plant to function. Therefore the requisition decree was cancelled because the
concrete goal the Mayor was trying to achieve was unattainable (and he had therefore wrongfully
exercised his powers). Clearly such a situation has nothing to do with an alleged « arbitrary measure
>> under the above mentioned Artide I of the 1951 Supplementary Agreement.
14. W as it « discriminatory >>?
l t is now necessary to ascertain whether the requisition in question was a« discriminatory >>
measure according to the terms of the same Artide. By adopting the thesis that the requisition
decree was aimed at giving IRI the time to expropriate the property of ELSI, the Government
of the United States contends that it was: the purpose is alleged to be discrirninatory insofar
as it aimed at favoring a public enterprise controlled by the Italian Government (27
).
This thesis, however, is not only groundless, but is also the result of an obvious misinterpretation
of the concept of discriminatory measure set out in Artide I of the 1951 Supplementary
Agreement.
It is possible to speak of discrimination only when two comparable situations are treated
in different ways to the detriment of the interests of one of the parties concerned. Within the
framework of a Treaty of Friendship, Commerce and Navigation which is essentially based on
(25) Memoria!, p. 36.
(26) See Memoria!, Annex 76, pp. IO-II.
(27) Memoria!, p. 36.
114 RASSEGNA DELL'AVVOCATURA DELLO STATO
the standard of national treatment, the situations to be compared for the purpose of ascertaining
whether the principle of the equality of treatment has been respected or not, are those of a foreign
investor and of the corresponding national investor. In the case in hand, it would therefore be
necessary to prove that Raytheon and Machlett, assurning that the requisition decree was addressed
to them, had been discriminateci against with respect to possible Italian investors. In
other words, that the requisitionc concerned them as United States companies, while the Italian
investors, if any, would not have suffered any damage. This must be ruled out entirely: not
even the Government of the United States has ever daimed that the requisition in question was
decided out of bias against United States companies. In fact, during the same years, requisition
was frequently used with regard to plants belonging to companies, the majority shareholders of
which were Italians (Part I, paragraph g).
Furthermore, the fact that IRI is considered by the Government of the United States to
be the beneficiary of the requisition is quite irrelevant. The daimant Government has contended
that the alleged favors extended to IRI by the Italian Government were one aspect of the unfavorable
treatment meted out to United States investors. But what is the logic behind this
assumption of a discrimination against the Raytheon and Machlett companies ? With respect
to what other subject in a sirnilar situation were the two United States companies discriminateci
against ? It should not be overlooked that, according to the highly imaginative presentation of
the facts made by the Government of the United States, IRI is equated to the ltalian Government,
which is accused of having «discriminateci» against the two United States companies.
With reference to what actually happened, we shall limit ourselves to repeating what has
been said above, namely that at the time of the requisition IRI had no intention of taking the
place of Raytheon and Machlett in controlling ELSI, not only in view of this company's extremely
poor technical and economie conditions, but also, and more simply, because, according
to IRI's industriai policy, it was not considered advisable to intervene on a larger scale in the
sector of ELSI's activities. Besides, the purposes of the decree of the Mayor of Palermo were
those stated in the text of the requisition order and nothing else.
It remains to be seen whether the decision related to the requisition the ELSI plant resulted
in damage to « other rights and interests » of Raytheon and Machlett or to investments made by
them in the form of financial contributions, i.e. loans or shares. In this connection it should
be emphasized from the outset that, in order to speak of damage resulting from violation of Artide
I of the 1951 Supplementary Agreement, the basic assumption must always be that the
requisition decree was arbitrary or discriminatory; an d we consider we ha ve already refuted
such an assumption. W e also wish to point out that the company subjected to the decree in question
was an Italian and not a United States company; moreover, loans and shares were not
directly affected. I t is in any case important to recall that the interests of the Raytheon an d Ma ehlett
companies, and the ultimate destiny of their investments, were jeopardized by events occurring
prior to the requisition, e.g. the proven incapacity of ELSI management to make a profit,
and its increasing insolvency, as well as by a subsequent fact, which was the consequence
of the above mentioned circumstances and in any case of the will of ELSI itself, namely the
dedaration of bankruptcy. As has been amply illustrateci in Part I, the requisition decree was
in practice a parenthesis in the life of ELSI. The only damage caused by the decree was that
of the temporary unavailability of a plant whose activities had already ceased without there being
any intention of resuming them. Therefore the Italian Government completely rejects the accusation
of having violated Artide I of the 1951 Supplementary Agreement.
PART v
ISSUES RELATING TO THE CLAIM FOR REPARATION
I. Subsidiary nature of the comments concerning the United States claim for reparation.
In the preceding parts of this Counter-Memorial, the Italian Government has shown that
the claim of the Government of the United States on behalf of Raytheon and Machlett is inadmissible
and, on a subsidiary basis, that the alleged infringements of the Treaty and the Supplementary
Agreement have not taken piace. As the Government of the United States claims reparation
on the basis of wrongful acts that habe not occurred, it is not strictly necessary to deal in
this Counter-Memorial with issues relating to reparation. However, on a further subsidiary basis,
the Italian Government addresses some remarks on the claim for reparation in order to point
out that even in this respect the claimant Government resorts to dubious contentions of law and
to distortions of fact - ali designed to maximize the amount of damages for which compensation
is requested.
Given the entirely subsidiary character of the comments expressed in this part, it seems
appropriate to make only a few generai remarks. However, the Italian Government expressly
notes that the fact that some assertions by the claimant Government are not specifically contested
by no means implies that the same assertions are recognized as accurate or supported by
sufficient evidence. In fact, the claimant Government heavily relies on documents originating
from ELSI or Raytheon or on affidavits of persons closely connected with Raytheon. The claim
essentially rests on the book valuation of ELSI's assets, while no analysis is offered of experts'
valuations which were given during the bankruptcy proceedings or of Raytheon's own prebankruptcy
« quick-sale valuation (l) ». As was shown (see Part l, paragraphs 7 and 17), the
book valuation in no way corresponded to the actual prospects of the sale of the assets.
Under the circumstances, the Italian Government notes that the claimant Government is
far from having discharged its burden of proof also with regard · to the alleged damages.
2. Links between the alleged violations of the Treaty and the alleged damages.
A claim for reparation may only be put forward for losses for which « in legai contemplation »
the alleged acts were « the efficient and proximate cause and source from which they flowed » (2).
This characteristic of being the efficient and proximate cause must pertain to the alleged wrongful
act or acts which is, or are, considered to have occurred. There must be a dose connection
between the infringement that has ex hypothesi occurred and the losses for which reparation is
claimed (3).
In the claimant Government's Memoria! the links existing between each alleged infringement
of a Treaty provision and the alleged Iosses are not explored. For example, the applicant
Government's contention that ELSI's bankruptcy was « the direct and foreseeable consequence
(l) Memoria!, p. 6o et seq.
(2) Thus the Administrative decision N. Il given by the United States-Germany Mixed Claims Commission,
7 Reports of International Arbitrai Awards, p. 30.
( 3) Strictly speaking, the loss suffered by nationals cannot be identified with the loss suffered by the State
as a consequence of the infringement of an obligation under international law. See Aao, Scritti sulla responsabilità
internazionale degli Stati, II, 2 (1986), p. 981.
116 RASSEGNA DELL'AVVOCATURA DELLO STATO
of the requisition arder" (4) is totally unacceptable. As was shown above (Part l, paragraph I I),
bankruptcy was rather the consequence of ELSI's state of financial affairs and of Raytheon's
declared unwillingness to make any further investments in its subsidiary. Nor could the delay
in the Prefect's decision over the appeal be considered as a cause of the bankruptcy since ELSI's
filing its application for bankruptcy carne only seven days after the appeal (Part l, paragraph
I4). Thus, even if the requisition decree and/or the delay in the decision over the appeal were
taken to be infringements of Treaty provisions, no obligation to make good the alleged losses
in the bankruptcy proceedings could be justified.
3· Considerations on the sums paid by Raytheon as a guarantor of ELSI's loans, or claimed by the
United States in relation to Raytheon' s credits towards ELSI.
The Government of the United States also seeks to recover sums that Raytheon had to
pay in the bankruptcy proceedings because it had guaranteed some loans taken by ELSI. These
guarantees were not an investment, but only a security covering so % of the loans which were
given to ELSl by some Italian banks and which were otherwise unsecured. The banks lost
so % of the money borrowed by ELSI. This money had contributed to ELSI'S assets. By
claiming the money which Raytheon later paid as guarantor for the other so %, the govemment
of the United States attempts to shift on to the Italian Government the loss of money which
was borrowed and actualiy used by ELSI and never paid back to the lenders. It would be an
extraordinary Treaty provision indeed that which would imply that the Italian Govemment
should make good a financial loss of a United States company for money that had been freely
used by that company's ltalian subsidiary.
Substantial sums are claimed in relation tò credits that Raytheon or other companies of
the same gròup had towards ELSI. These sums do not necessarily correspond to investments.
No claim had been made with regard to these credits in the bankruptcy proceedings (5). Given
the fact that ali these credits exist towards companies ali belonging to the same multinational
group, their assessment would require particular care in evaluating the services actualiy rendered
and the goods provided - both with regard to ELSI's need for these services and goods, and
their prices in relation to fair-market prices.
4· The issue of the legai expenses incurred by Raytheon.
Legai expenses incurred by Raytheon can hardly find their « proximate cause " in the alieged
infringement of a treaty provision. « Legai and related expenses » incurred by Raytheon
« in pursuing its claim against the Government of Italy for its actions against ELSI " (6) are at
best part of the costs relating to the present proceedings. Most of the alleged legai expenses
concemed lawsuits initiated by five Italian banks - all independent entities - which are grossly
misdescribed as « government banks acting pursuant to a government pian " (1) when they were
only seeking to recover their financial losses over money borrowed by ELSI with a guarantee
coverii:J.g only so % of the sums (B). These lawsuits are clearly unrelated to any alieged infringement
of the Treaty. Even the claimant Government's contention that, had there been an
<< orderly >> liquidation, the banks "would have settled their debts (sic) with ELSI" (9) is sheer
(4) Memoria!, p. 6o.
(5) Cf. Memoria!, Annex 26, p. 9·
(6) Memoria!, p. 62.
(7) Memoria!, pp. 6r-62.
(B) The banks invoked Artic!e 2362 of the Italian Civil Code and contended that, since Raytheon was in substance
the sole stockholder of ELSI, the corporate veil should be lifted against the United States company. The
acquisition of a smaii part of shares by Mach!ett appears to have been a device for avoiding the application of the
said provision against Raytheon. Italian :courts accepted Raytheon's argument that Machlett was in fact a separate
entity, although fuily owned by Raytheon.
(9) Memoria!, p. 62.
CONTROMEMORIA DEL GOVERNO ITALIANO 117
speculation. Moreover, costs were awarded to Raytheon by Italian courts in the same litigations
(1°): the awards cover norma! legai expenses, including fees corresponding to lawyers'
tariffs; any further legai expense possibly incurred into by Raytheon cannot be considered to
be reasonable under the circumnstances.
S· The claim relating to interests.
With regard to interests the Italian Government recalls that in the Lighthouses case the
Arbitrai Tribuna! stated as follows :
« ( ... ) no strict rules of law of a generai character exist which prescribe or forbid the award
of interest. The Arbitrai Tribuna! cannot accept the views expressed thereon by the two Agents,
with opposing results. Also in this respect the solution largely depends on the character of each
particular case " (11).
No interests were awarded by the Court in the Corfu Channel case. The Government of
the United Kingdom had not claimed interests but the Court did not referto this circumstance
and said:
« The Court considers the true measure of compensation in the present case to be the replacement
cost of the Saumarez at time of its loss" (12).
Among the circumstances to be considered in the present case is that the application to the
Court could well have been made many years earlier. As the Government of the United States
stated in its Memorandum of Law of 1974: «In none of the outstanding proceedings is it possible
for Raytheon and Machlett to recover any compensation which resulted from the acts and
omissions of the Government of Italy on which this claims is based " (13). Thus, if one considers
the claim to be admissible contrary to the contention of the Italian Government, the claim would
have been equally admissible ìn 1974.
The applicant Government's claim for coumpound interests finds little support in practice.
The following quotation from the arbitrai award in the British Property in the Spanish Zone of
Morocco case appears to be particularly relevant in this context:
« With regard to the choice between simple interests and compound interests, the Arbitrator
must first of ali state that arbitrai jurisprudence concerning compensation that a State
should gran t to another for damages suffered by nationals of the latter-although i t is particularly
rich - is unanimous, as far as the Arbitrator knows, in denying compound interests » (14).
(10) Documents Ns. 41-42.
(11) 12 Reports of lnternational Arbitrai Awards, p. 252. In the originai French the text reads as follows: • ... il
n'existe de règles de droit rigides d'ordre général qui prescrivent ou interdisent l'allocation d'intèrets. Le Tribuna!
ne saurait admettre !es thèses des deux Agences qui s'y réfèrent, d'ailleurs en des sens opposés. Ici encore la sollution
dépend largement des caractéristiques de chaque cas particulier >>.
(12) I.C.J. Reports 1949, p. 249.
(13) • The Claim •>, p. 56.
(1 4) 2 Reports of lnternational Arbitrai Awards, p. 6so. In the originai French the text reads as follows:
• En ce qui concerne le choix entre !es intérèts simples et !es intérllts composés, le Rapporteur doit tout d'abord
constater que la jurisprudence arbitrale en matière de compensation à accorder par un Etat à un autre pour dommages
subis par !es ressortissants de celui-ci sur le territoire de celui-là - jurisprudence pourtant particulièrement
riche - est unamine, pour autant que le rapporteur le sache, pour écarter !es intérèts composés ~.
SUBMISSIONS
The Italian Government makes the following submissions:
« May it please the Court,
To adjudge and dedare that the Application fìled on 6 February I987 by the United States
Government is inadmissible because local remedies have not been exhausted.
If not, to adjudge and dedare :
(I) That Artide III (2) of the Treaty of Friendship, Commerce and Navigation of
2 February I948 has not been violated;
(2) That Artide V (I) and (3) of the Treaty has not been violated;
(3) That Artide V (2) of the Treaty has not been violated;
(4) That Artide VII of the Treaty has not been violated;
(5) That Artide I of the Supplementary Agreement of 26 September I9SI has not been
violated;
and accordingly, to dismiss the daim ».
I6 November I987.
Professor LUIGI FERRARI BRAvo
Agent of Italy
DOCUMENTS
TABLE OF CONTENTS
x. - Treaty of Friendship, Commerce and Navigation between the United States of America
and the Italian Republic, signed at Rome, 2 February I948, entered into force, 26 July
I949 - 79 UNTS I7I.
2. - Agreement Supplementing the Treaty of Friendship, Commerce and Navigation of 2
February I948, signed at Washington, 22 September I95I, entered into force, 2 March
I96I - 4·04 UNTS 326.
3· - Chamber of Deputies, Parliamentary Proceedings, Documents - Bills and Reports, N.
246, pages I-6, Session of I7 December I948.
4· Chamber of Deputies, Parliamentary Proceedings, Documents - Bills and Reports, N.
246-A, pages I-9, Session of I7 December I948.
5· - Chamber of Deputies, Parliamentary Proceedings, Debates, Session of 24 March I949,
pages 7396-7404.
6. - Chamber of Deputies, Parliamentary Proceedings, Debates, Session of 25 March I949,
pages 7427-744I.
7· Senate of the Republic, Bills and Reports, I948-I949, N. 344-A, Report of the Majority,
pages I-Io, sent to the Office of the President on 28 May I949·
8. Senate of the Republic, Parliamentary Proceedings, I948-I949, Session 221, Debates,
7 June I949, pages 8I37-8I39·
9· - Chamber of Deputies, Parliamentary Proceedings, Legislature III, Documents - Bills
and Reports, N. 537, pages I-7, presented to the Office of the President on 8 November
I958.
IO. Chamber of Deputies, Parliamentary Proceedings, Legislature III, Debates, Session of
7 October I959, pages I0829-10831.
II. Chamber of Deputies, Parliamentary Proceedings, Legislature III, Debates, Session of
I5 December I959, pages I2272-I228I.
12. Senate of the Republic, Session of the Committees, 23 May I96o, page 22.
13. Senate of the Republic, Parliamentary Proceedings, Legislature III, 1958-6o, Bills and
Reports, Documents N. 93I-A, sent to the Office of the President on I8 }tùy I96o,
pages 1-3.
14. - Senate of the Republic, Parliamentary Proceedings, Legislature III, Session 29I, Assembly,
I9 July 1960, pages 13758-13759.
I5. - Hearing before a Subcommittee of the Committee on Foreign Relations, United States
Senate, Eightieth Congress, Second Session, on a proposed Treaty of Friendship, Commerce
and Navigation between the United States and Italian Republic, Aprii 30, I948.
I6. - Commerciai Treaties, Hearing before a Subcommitee of the Committee on Foreign Relations,
United States Senate, Eighty-Second Congress, Second Session, Treaty of
Friendship, Commerce and Navigation between the United States and Colombia, Israel,
Ethiopia, Italy, Denmark and Greece, May 9, I952.
120 RASSEGNA DELL'AVVOCATURA DELLO STATO
17. - Hearing before the Subcorrtmitee of the Committee on Foreign Relations, United States
Senate, Eighty-Third Congress, First Session, Executives R, (82d Cong., 2d Sess.) F
(82d Cong., 2d Sess.) H (82d Cong., 2d Sess.), I (82d Cong., 2d Sess.), J (82d Cong., 2d
Sess.), C (83d Cong., 1st Sess.), N (83d Cong., xst Sess.), O (83d Cong., xst Sess.);
Treaties of Friendship, Commerce and Navigation with Israel, Ethiopia, Italy, Denmark,
Greece, Finland, Germany and Japan, respectively.
18. - Artide 2362 of the Italian Civil Code.
19. - Artide 2446 of the Italian Civil Code.
20. - Artide 5 of the Unified Text 3 March 1934, N. 383 of the Municipal and Provincial
Law, modified by the Law 27 }une 1942, N. 851 and by the Law 9 }une 1947, No. 530.
21. - Artides 6, x6o, 216 and 217 of the Italian Bankruptcy Law, Royal Decree of x6 March
1942, N. 267.
22. - Artides I, 2 and 3 of the Law 22 December 1956, N. 1589 « Institution of the Ministry of
State Participation in Industry ».
23. - Decision N. 3086 of the Court of Cassation dated 23 October 1974, N. 3086, Foro Italiano
(1976), l, n66.
24. - Decision N. 198 of Abruzzo Regional Administrative Tribunal, dated 30 December
1974, Foro amministrativo (1976), I-2, 453·
25. - Decision N. 3 of Apulia Regional Administrative Tribunal, dated 28 January 1975, Foro
Italiano (1976), III, 31.
26. - Decision N. 208 of the ltalian Council of State, Section IV, 25 February 1975, Consiglio
di Stato, 1975, l, no.
27. - Decision N. 210 of Lombardy Regional Administrative Tribunal, dated July 1975, Rassegna
dei T.A.R., 1975, I, 3076.
28. - Decision N. 21 of the Italian Council of State, Section IV, dated x8 January 1977, Consiglio
di Stato, 1977, I, 67.
29. - Decision N. 72 of the Italian Council of State, IV Section, dated 7 February 1978, Consiglio
di Stato, 1978, l, 169.
30. - Certificate of the Italian Ministry of the lnterior concerning the average time taken to
examine appeals.
31. - Excerpts from the decision of the Board of Directors regarding the merger of ELSI
S.p.A. with SELIT (1965).
32. - Notes and comments concerning the books and the documents attached to the petition
in bankrupcty.
33· - Telex N. 570/2 of 6 Aprii 1968 from the Mayor of Palermo to Avvocato Nicolò Maggio
and Dr. Armando Celone.
34· - Telex N. 568/2 of 6 Aprii 1968 from the Mayor of Palermo to Ing. Profumo.
35· - Letter from the Mayor of Palermo entrusting Ing. Laurin with the management of the
plant, 16 Aprii 1968.
36. - Court of Palermo - Bankrupcty Division - Technical accounting consultancy of Raytheon
- ELSI S.p.A.
37· - Sicilian Regional Law N. 12 of 13 May 1968, (« Special Benefits for employees of ELSI
of Palermo and SATS of Messina»).
38. - Sicilian Regional Law N. 23 of 6 August 1968 (« Further Special Benefits for employees
of ELSI of Palermo»).
39· - Sicilian Regional Law No. 31 of 23 November 1968 («Integrative provisions to Regional
Law N. 23 (2) of 8 August 1968, concerning further special benefits for employees of
ELSI of Palermo »).
40. - Report of the bankrupcty Receiver, Avvocato Siracusa, 6 March 1970.
CONTROMEMORIA DEL GOVERNO ITALIANO 121
41. - Decision N. 5143 of the Court of Cassation, I Section, 7 October 1982.
42. - Decision N. 6712 of the Court of Cassation, I Section, 9 December 1982.
43· - Decision N. 2879 of the Court of Cassation, 9 May 1985, Giurisprudenza Commerciale
(Ig86), II, pages 537-564.
44· - Affidavit of Ing. Busacca, dated 30 October 1987.
UNNUMBERED DOCUMENTS
- Verbal notes of the Embassy of the United States of America, Rome, 7 February I974·
- The Claim of Raytheon Company and the Machlett Laboratories, Incorporated, against the
Government of Italy in connection with Raytheon-Elsi S.p.A. (same date as the verbal no•
tes).
Volume I - Statement of facts
Volume 2- Memorandum of LaVI
Volume 3 - Opinions referred to in Memorandum of Law
Volume 4 - Exhibits I-I through III-25
Volume 5 - Exhibits III-26 through end

REPLY
SUBMITTED BY THE
UNITED STATES OF AMERICA
(CASE CONCERNING ELETTRONICA SICULA S.P.A. - ELSI)
18 MARCH 1988

PARTI
INTRODUCTION
This R~ply. acldresf;lel! the nume~:ous. unsubstantiatecl, irrelevant, OJ:'. incorrect assertions
macle by the R,esponclent in its Counter-Memorial, filecl x6 November 1987. The Responclent
both illegally · requisitionecl Elettronica:-Sicula, S.p.A. (« ELSI »), frustrating Raytheon's ancl
Machlett's plannecl orderly liquidation of ELSI, ancl interferecl in the subsequent bankruptcy
PtOceeclings. Y et th!'l Responcl!'lnt denies that its acts violated various provisions of the Treaty
oiFrienclship, Collli):}!'ll'Ce ancl Na.vigation between the Unitecl States and the It11lian Republic
(the « Tteaty »), which entered into force in 1949, ancl its Supplement, which entered into force
in 1961. This Repl:y is filecl in acc;ord,11nce with the Court's Orcler of 17 November 1987.
From li9S6 to J;967, R~tytheon a1;1cl Machlett invested l:lUbf:ltantilll amounts, of capitai ancl
other assistance in their Italian electronics. subsidiary, ELSI, with the expectation that ELSI
would become self-sufficient in the Italian market. Despite its reputation for qu!llity products
an cl its sizeable volume of sales, ELSI never became a $elf-s:ufficient, let . alone profitable,
enterprise. Contrary to Italy's assertions, R,aytheon and Machlett diçl nothing to cre~tte:ELSI's
financial problems.
In early 1967, Raytheon ancl Machlett initiated a comprehensive effort to cletermine the
reasons for ELSI's financial clifficulties. They determinecl that ELSI could survive in the ltalian
market only with a substantial improvement in its competitive environment: specifically, by
partnership with an Italian corporation or substantial cooperation by the Italian Government.
In early 1967, Raytheon and Machlett clecided that unless they could secure a pianto improve
ELSI's competitive environment, they woulcl proceed with an orderly liquiclation of ELSI's
assets within a year. This decision was communicated to the Respondent.
Although the Respondent made broacl proposals for ELSI's continuecl operation, these
proposals requirecl that Raytheon and Machlett make substantial additional investments in
ELSI with no prospect of recovering that investment, while continuing to cover ELSI's losses.
Raytheon and Machlett reluctantly decided in March of 1968 to proceecl with the orderly liquiclation
as planned. Uncler that plan, Raytheon ancl Machlett would aclvance all funcls necessary
to allow ELSI to be sold as a going concern.
lnstead of allowing Raytheon and Machlett to liquiclate ELSI in an orderly fashion, the
Responclent, in violation of Italian law, requisitionecl ELSI's plant and assets on I Aprii xg68
allegeclly because the orderly liquiclation of ELSI woulcl cause « social unrest ». At no time,
however, clicl the Responclent ever resume the operation of the plant or re-employ ELSI's
workforce. This unjustified ancl illegal requisition prevented Raytheon ancl Machlett from selling
ELSI's assets ancl thus proceeding with the orderly liquidation as plannecl. Although Raytheon
and Machlett immecliately took all possible steps to bave the requisition rescinded, the Respondent
refused to quash the order ancl indeed tolcl Raytheon that it woulcl continue inclefinitely.
Since ELSI was deprived of the revenue with which to meet continuing financial obligations,
Raytheon ancl Machlett directed ELSI to file a petition in bankruptcy on 26 Aprii 1968 in
accorclance with Italian law.
Following the filing of ELSI's petition in bankruptcy, the Responclent continuecl to exploit
the situation in which the requisition hacl placecl ELSI's assets, eventually acquiring ELSI
for itself. Only after ELSI had been purchased by the Respondent, the Respondent's administrative
and judicial organs ruled that the Responclent's requisition of ELSI was unlawful as
a matter of ltalian law. Unfortunately, the Respondent was required by its courts to pay only
9
126 RASSEGNA DELL'AVVOCATURA DELLO STATO ------------------------------·
a small fraction of the compensation it should have paid to remedy the damage the Respondent
caused. Accordingly, Raytheon and Machlett incurred substantial losses as a direct result of
the Respondent's actions.
These actions of the Respondent violated several provisions of the Treaty. The Treaty
violations in this case are dear from the ordinary meaning of the artides cited by the United
States. The Respondent's broad assertions about the application of the Treaty and what interests
it protects are unfounded; the Treaty provisions cited by the United States protect United
States shareholders of companies incorporated in Italy. The requisition and other conduct
by the Respondent were both arbitrary and discriminatory, prevented Raytheon and Machlett
from managing and controlling an Italian corporation whose shares they had lawfully acquired,
and resulted in the impairment of their legally acquired rights and interests -- in violation of
Artides III and VII of the Treaty and Artide I of the Supplement. In addition, the requisition
constituted a taking of Raytheon's and Machlett's interests in property without due process
and without adequate compensation, in violation of Artide V of the Treaty. The Respondent
also failed to comply with the obligation under Artide V to afford protection and security, by
the unwarranted delay in ruling on the challenge to the requisition order and by failing to afford
protection to ELSI's plant and premises. These violations, singly and in combination, entitle
the United States to receive full compensation for the damages suffered by Raytheon and
Machlett.
Italy does not contest the jurisdiction of this Court. Italy does assert that the daims of the
United States are inadmissible because local remedies, in the form of a suit in Italian courts
based on the Treaty, were not exhausted. The principle that local remedies be exhausted was
followed in this case. All reasonable steps were taken to obtain compensation from the Respondent
for the unlawful requisition of ELSI. Further resort to Italian courts on the basis of the Treaty
is unavailable or unreasonable. In any event, the Respondent is estopped from insisting on
such action at this time. Consequently these daims are properly before the Court.
PARTII
STATEMENT OF FACTS
CHAPTER I
THE DECISION TO LIQUIDATE ELSI
SECTION I. - ELSI Received Extensive Financial and Managerial Assistance jrom Raytheon
and Machlett but Could Not Become Economically Self-sufficient.
By 1967 ELSI had become a respected manufacturer of sophisticated electronic components
and equipment with a modern, fully-equipped plant in Palermo, a reputation for quality products,
and a significant volume of sales and export earnings (1). I t had been Raytheon's and Machlett's
expectation from the outset that ELSI would gain access to Italian markets, develop new products,
and continue to become more efficient in its operations. ELSI, however, was never able
to achieve the financial self-sufficiency that Raytheon and Machlett had anticipated (2).
John Clare, chairman of the Board of Directors of ELSI, and other qualified technical
experts under his supervision, prepared an in-depth study of ELSI's potential for survival
in the Italian market (3). They determined that ELSI could operate effectively in Italy only
with the addition of an Italian partner, infusion of capitai, introduction of new products, and
greater access to Italian markets (4). These conclusions, previously communicated to the Respondent,
were summarized in a report which was distributed to senior officials of the Italian
Government, the Sicilian Government, IRI (5), Italian banks, and other members of the Italian
establishment (6).
The Counter-Memorial presents additional factors that allegedly contributed to ELSI's
inability to become financially self-sufficient, including ELSI's geographic location, the quality
and prices of ELSI's products, and the obsolescence of some of ELSI's production lines (1).
(l) For a discussion of ELSI's product lines and markets, see Memoria!, pp. 6---;.
(2) For a discussion of ELSI's fìnancial performance, see Memoria!, p. 7; Affidavit of Arthur Schene,
Former Vice President-Controller of Raytheon Company, 17 Apr. 1987 (Annex 13).
( 3) In 1967 Raytheon and Machlett designated John Clare, Raytheon Vice President and Generai Manager
of its European management subsidiary, Raytheon Europe International Company, to be ELSI's chairman.
They also appointed severa! other highly qualifìed persons to assist ELSI. Memoria!, p. 7·
(4) Memoria!, p. 8; Affidavit of John D. Clare, Former Chairman, Raytheon Europe International Company,
10 Jan. 1987, para. 18 (Annex 15).
( 5) Istituto per la Ricostruzione Industriale (« IRI ») is a holding company owned and controlled by the
Respondent. It has extensive and wide-ranging commerciai and banking interests dominating, among other
things, the telecommunications, electronics, and engineering markets. Memoria!, pp. 8-9. IRI's actions are
thus attributable to the Respondent. Memoria!, p. 41.
(6) Memoria!, Annex 15, para. 20; Memoria!,« Project for the Financing and Reorganisation of the Company •,
1967 Report prepared by Raytheon-Elsi, S.p.A. (Annex 22).
(7) Counter-Memorial, pp. 77-78.
128 RASSEGNA DELL'AVVOCATURA DELLO STATO
The Respondent itself engaged in sustained efforts to attract commerce to the Mezzogiorno
region by publicized incentives (B); thus it is ironie that Respondent now attempts to question
Raytheon's and Machlett's decision to invest in the region. Despite numerous inquiries to,
and promises of, appropriate Italian authorities, these benefìts never materialized (9
). Receipt
of these benefìts would have improved ELSI's fìnancial condition and enhanced its attractiveness
to prospective buyers.
Further, ELSI had developed a reputation for the manufacture of high quality and highly
sophisticated electronics (1°). In preparation for the introduction of color television in Europe,
ELSI had constructed a modern, up-to-date facility for color television research and development
pending the decision by Italy and other European countries as to the type of television system
they would adopt (11). In addition, by 1967 ELSI had already moved from production of
gerrnanium transistors, which had become technologically obsolete, to the production of silicon
rectifìers (12).
Of course, the reasons for ELSI's fìnancial problems are not relevant to the dispute before
this Court and were merely presented as background information in the United States Memoria!.
Whatever the reasons for ELSI's inability to become a profìtable enterprise, Raytheon and
Machlett were still entitled to put ELSI through an orderly liquidation under their own contro!.
The criticai questions is whether the Respondent wrongfully requisitioned the plant, prevented
its orderly liquidation, permitted the plant to be occupied, and subsequently rnanipulated the
bankruptcy process to its own advantage.
SECTION 2. - Raytheon's and Machlett's Good Faith Efforts to Negotiate a Solution to ELSI's
Problems W ere Frustrated by the Respondent
Beginning in early 1967 Raytheon made it clear to the Respondent that ELSI could not
operate effectively in Italy and that Raytheon would not make additional capitai contributions
to keep ELSI operating without greater cooperation by the Respondent. In approximately
70 meetings with cabinet level officials of the national an d Sicilian governments, J ohn Clare
and other Raytheon officials presented numerous specifìc proposals for government partnership
in ELSI and government support for ELSI's development of new products and markets (13).
Raytheon proposed that ELSI fìnd an Italian partner. IRI, for example, dominated the
Italian electronics industry at this time and controlled important segments of it, such as the
manufacture of telephone components (14). At fìrst, the Respondent made encouraging statements,
(B) Memoria!, p. 3·
(9) The Respondent's argument that ELSI's distance from its suppliers of glass tubes in northern ltaly is
relevant, if at ali, only to one of ELSI's product lines, cathode ray tubes. Of course, the transportation subsidy
would have removed any disadvantage in this regard, had the Respondent put this program into effect as it had
promised. Memoria!, pp. 8-1 I. The Respondent's argument with respect to semiconductors is also misplaced as
transportation costs of these items is negligible relative to total cost.
(10) Memoria!, pp. 6-7.
(11) Respondent's suggestion that ELSI's products !acked reliable markets is also misplaced. CounterMemorial,
pp. 77-78. ELSI was poised to enter the market for color television. Furthermore, ELSI's sales to NATO,
while irregular by nature, were hardly << dwindling to nothing >>. See Memoria!, Annex 22, Appendix B4. Nonetheless,
ELSI recognized that military sales could not form an exclusive operating basis and for that reason sought
to develop new products and markets. Memoria!, Annex 22, p. 9·
(12) Memoria!, Annex 22, p. 14.
(13) Memoria!, p. 9·
(14) Memoria!, pp. 8-9; Affidavit of Charles F. Adams, Finance Committee Chairman and Director of
Raytheon Company, 17 Apr. 1987, para. 30 (Annex 9); see Annex 15, para. 31.
REPLICA DEL GOVERNO U.S.A. 129
but the Respondent was unwiliing in the end to agree to a concrete, viable solution to ELSI's
problems (u). Under the Respondent's proposals, Raytheon and Machlett would continue to
bear the operating losses of ELSI without itself committing to take specifìc actions to improve
ELSI's ability to compete. Raytheon, however, could not agree to incur continuing losses or
to defer any longer its pian for the orderly liquidation of ELSI.
SECTION 3·- As is Permitted under Italian Law, Raytheon and Machlett Decided to Place ELSI
through an Orderly Liquidation rather than through Bankruptcy Proceedings.
Under Italian law, shareholders are entitled to liquidate a company's assets voluntarily,
by their own resolution (16). Therefore on 28 March 1968, having decided that the orderly
liquidation of ELSI's assets was prudent in view of ELSI's fìnancial situation, Raytheon and
Machlett voted in accordance with ltalian law to proceed with the pian for orderly liquidation
prepared by ELSI's management.
ELSI's management made preparations to seli ELSI as a going concern, with an established
name and reputation, customer and supplier relationships, and the necessary patent and trademark
licenses. ELSI would maintain a limited operation to complete work-in-process, and
ELSI's management took ali possible steps to maintain good relationships with ELSI's customers
and suppliers. Raytheon and Machlett planned to offer ELSI's six product lines either as a
total package or individually to maximize the realizable price (17), and made it known that they
were willing to enter into technical assistance agreements with the ultimate purchasers of ELSI.
Raytheon also made the commitment to advance any funds to provide the necessary liquidity
for the orderly liquidation. Raytheon established a US $1.25 million line of credit to cover payment
of the smali creditors, and ELSI began making payments to them in March of 1968 (18). In
addition, Raytheon was willing to pay ali creditors whose claims were not satsifìed by the sale
of ELSI's assets (19).
It was clear to Raytheon and Machlett that an orderly liquidation would generate far
greater revenue from the sale of ELSI's assets than would a bankruptcy process. In the fìrst
piace, Raytheon would have used its knowledge of the electronics industry to locate buyers
on a worldwide basis and to negotiate the terms for the sale of ELSI's six product lines, maximizing
the return for both creditors and shareholders. Further, Raytheon and Machlett would
have realized the substantial value of ELSI's intangible assets, including the technical assistance
agreements that could be negotiated with each purchaser. Finaliy, with Raytheon and Machlett
(16) Respondent initially made encouraging statements that IRI would agree to participation in ELSI.
See, e.g., Minutes of Meeting with Hon. Vincenzo Carollo, President of the Sicilian Region (20 Feb. I968) (the
alleged discrepancies in the minutes to this meeting are refuted in the letter from Timothy E. Ramish, DeputyAgent
of the United States, to the Registrar of the Court, dated I3 Jan. I988). Respondent's encouragement never
materialized in a specific or written proposal for ELSI's future operations. See, e.g., Memoria!, Annex IS, Exhibit
G, p. 3·
(16) Artide 2448, N. 5 of the Italian Civil Code provides that a joint stock company may be dissolved by
resolution of the shareholders at a meeting called by the directors. M. BELTRAMO, G. LONGO, and J. MERRYMAN
(trans.), The Italian Civil Code (I969), p. 6n. See also Statement by Professar Franco Bonelli, 2 Mar. I988 (Annex I
t o this Reply).
(17) Each product line could be sold as a separate package, including the respective technology, contracts
customer and supplier bases, and established name and reputation to buyers elsewhere in ltaly, Europe, or Japan.
See Affidavit of Joseph A. Scopelliti, Memoria!, para. I2 (Annex I?).
(18) Memoria!, Annex IS, para. 53·
(19) Memoria!, Annex I3, para. I8. Although the Respondent fails to so distinguish, Counter-Memorial,
p. 82, Raytheon's and Machlett's commitment to fund the orderly liquidation in order to maximize the return
on its investment must be distinguished from Raytheon's and Machlett's refusal to continue to cal?itali2:e ELSI
with no prospect of a return on their investment.
130 RASSEGNA DELL'AVVOCATURA DELLO STATO
in control of ELSI's liquidation, Raytheon could ensure that the plant, equipment, and inventory
would be well-maintained and protected.
A trustee in bankruptcy, by contrast, lacked the commerciai and technical expertise and
the financial incentive to market ELSI or its product lines effectively on a worldwide basis to
appropriate buyers (2°). Further, the bankruptcy process did not afford a vehicle for the marketing
and sale of the intangible value of ELSI as a going concern, including the premium that would
be placed on Raytheon's willingness to enter technical assistance and license agreements with
the ultimate purchasers. Moreover, Raytheon and Machlett recognized that the bankruptcy
process would not result in the sale of ELSI's assets quickly. Deterioration in the assets caused
by delay in the sale would, of course, diminish the return to ELSI's creditors and shareholders.
Finally, Raytheon and Machlett sought to avoid the substantial administrative costs associated
with the bankruptcy process, costs which would not have been incurred under the orderly
liquidation.
Sale of ELSI's assets on a going concern basis (21) would have been sufficient to pay ali of
ELSI's liabilities in full, including amounts owed to Raytheon, and return lire 391 million to
Raytheon and Machlett as a small return on their large investments they had made in ELSI (22).
Of course, Raytheon had good reason to believe that the bank creditors would settle their unsecured,
unguaranteed claims at no more than so percent (J3).
SECTION 4·- At No Time Prior to I April 1968 Was it Required by Italian Law that ELSI Be
Placed in Bankruptcy.
Prior to the requisition, ELSI was never in jeopardy of bankruptcy or compulsory dissolution.
ltalian law would have required ELSI to file a petition in bankruptcy if it was impossible
for ELSI to fulfill regularly its financial obligations (24). Alternatively, ELSI could have been
considered dissolved as a matter of Italian law only if its capitai were depleted below a statutory
minimum amount (at the relevant time the statutory minimum amount was one million lire) (2 5).
ELSI never contravened these laws. Until ELSI was deprived of its·revenue by the requisition,
ELSI consistently met and was in a position to meet ali of its financial obligations (26).
ELSI's capitai, even after taking into account losses, was always well above the statutory minimum
(27
). Thus, contrary to the Respondent's unsubstantiated assertions, ELSI had no obligation
to file a petition in bankruptcy, nòr was it subject to compulsory dissolution. Raytheon and
Machlett were fully entitled to proceed with the orderly liquidation of ELSI's assets under
Italian law.
(20) Reply, Annex x, para. 2.
(21) In this case, book value is the dosest available approximation of going concern value. See injra, Part VI,
Chapter III.
(22) Memoria!, pp. x x, 6o.
(23) Memoria!, p. II. Willingness of the banks to settle their daims with ELSI a t 40 to so percent of their
value is further evidenced by the banks' agreement to settle for so percent or less of their daims in the fan of 1968.
Counter-Memorial, pp. 93-94; see also Reply, Annex x, para. 3·
(24) Reply, Annex x, para. 4; Italian Bankruptcy Act, Artide s (Annex x).
(25) Artide 2447 of the Italian Civil Code states:
« If, by reason of the loss ... [exceeding] over one-third of the capitai, [the capitai] fans below the m1rumum
established by artide 2327, the directors (2380) shan without delay can the meeting (236s) to decide on the
reduction of the capitai and the concurrent increase thereof to an amount not less than said minimum, or
on the reorganization of the company >.
Italian Civil Code, op. cit., pp. 6ro-II; see also Reply, Annex r, para. S·
(26) In addition, the Respondent seems to overlook the fact that the book value of ELSI's assets was consistently
greater than ELSI's liabilities. See Counter-Memorial, pp. 86-87; Memoria!, Annex 13, Schedule Br;
Reply, Annex r, para. S·
( 27) Memoria!, p. 12, note 19; Reply, Annex x, para. s.
REPLICA DEL GOVERNO U.S,A, 131
The Respondent also maintains that ELSI was in violation of Artide 2446 of the ltalian
Civil Code with respect to the size of its losses and in violation of the Italian Bankruptcy Act
due to its bookkeeping practices. These assertions, like many of those found in the CounterMemorial,
are irrelevant to the claims before this Court. In the interest of accuracy, however,
it must be noted that ELSI was fully in compliance with Italian law, both with regard to capitalization
requirements {28) and with regard to bookkeeping practices (29),
(28) Article 2446 of the Italian Civil Code provides that when a company's losses exceed one-third of its
capitai, the shareholders - after a one-year grace period from the date they are or should be aware of such losses
(typically at the time they review the balance sheets) - must either reduce the company's capitai in proportion
to the losses to correct the imbalance or make alternative arrangements for the disposition of the company. ltalian
Civil Code, op. cit., p. 6xo. Following the review of the balance sheets for the fiscal year ending 30 September
1966, ELSI reduced the value of its stock, thereby diminishing its losses. Raytheon and Machlett invested an
additional lire 2,500 million in ELSI, thereby bringing the company's capitai to lire 4,ooo million. Memorial
Annex 13, Schedule Bx. Notwithstanding these efforts, ELSI's losses once again exceeded one-third of its capitai
in the fiscal year ending 30 September 1967. This time, however, ELSI's shareholders voted within the one-year
grace period, to liquidate the company rather than adjust its capitai. See Memoria!, Annex 32. This decision was
in complete compliance with Article 2446. Reply, Annex x, para. 6.
(29) There is also no merit to the Respondent's assertion that ELSI's books were not properly kept. CounterMemorial,
p. Sx. From the time Raytheon acquired a majority interest in ELSI, Coopers & Lybrand, an
internationally respected accounting firm, audited ELSI's books. To allow time for its foreign operations to close
their year-end books and to transmit their accounting data to Raytheon, Raytheon's foreign operations typically
closed their books three months prior to Raytheon's consolidated report of December of each year. Under this
system, Coopers & Lybrand audited ELSI's books and prepared a year-end report for the year ending 30 September
1967. The books for the period through 31 December 1967, were kept on a normal basis at Palermo and
a complete management report for that period, consistent with the closing of 30 September 1967, was transmitted
to Raytheon in the first quarter of 1968. The balance sheet at 31 March 1968 was prepared on a basis consistent
with the valuations in the Coopers & Lybrand audit report of 30 September 1967 and a conservative extrapolation
to 31 March 1968. Memoria!, Annex 13, p. 8. Any abnormal delay in the preparation of ELSI's books was due
solely to earthquakes in Sicily and strikes at the plant in early 1968; these were brief and unavoidable interruptions
in ELSI's bookkeeping operations and did not constitute violations of Italian law. Reply, Annex x, para. 7•
CHAPTER II
THE REQUISITION AND RESUL TING BANKRUPTCY
SECTION I. - Rather than Allow Raytheon and Machlett to Place ELSI through a Lawful,
Orderly Liquidation, the Respondent Requisitioned ELSI.
By March of 1968, Raytheon's and Machlett's plan for the orderly liquidation was in place
and the fìrst steps of implementing it had begun. Raytheon and Machlett had extended the
line of credit for payment of the small creditors and was engaged in discussions with the ltalian
banks for settlement of the large unsecured, unguaranteed debts.
One event alone prevented the orderly liquidation of ELSI's assets: the unlawful requisition
by the Respondent of ELSI's plant and equipment on I Aprii I968. The requisition deprived
ELSI of control of the plant and physical assets. It prevented Raytheon and Machlett from
proceeding with the sale of ELSI's assets and prohibited ELSI's management from continuing
as planned with limited production and sale of inventory at full value to waiting customers (30).
As discussed in Part V, below, the requisition was a deliberate act by the Respondent to
prevent Raytheon and Machlett from proceeding with the orderly liquidation of ELSI's assets.
The requisition was purportedly for the purpose of protecting (( the economie public interest n
that was threatened by the proposed liquidation (81). However, during the requisition the Respondent
never re-opened the plant, otherwise resumed production, or re-employed the plant's
workers (32).
Raytheon immediately tried to get the requisition rescinded. On 9 Aprii Raytheon petitioned
the Mayor to lift the requisition order, but received no response. On 19 Aprii Raytheon appealed
the requisition to the Prefect of Palermo, and again received no response (33). Determined
not to foreclose any possibility of re-opening the plant, officers of Raytheon and ELSI continued
to meet with ltalian officials even after the requisition of ELSI. The Respondent, however,
was stili unwilling to come forward with any real proposals to improve ELSI's competitive
position (34
). The Counter-Memorial seeks to portray the Respondent as eager to enter into a
negotiated settlement by these proposals (36), but these proposals are irrelevant to the question
whether the requisition and subsequent interference with the bankruptcy process violate the
Treaty. In addition, the Respondent's admitted use of the requisition to coerce Raytheon and
Machlett into carrying indefìnitely operating losses of ELSI is precisely the type of governmental
action which the Treaty condemns.
(SO) Memoria!, pp. 27-29. Although the requisition deprived Raytheon and Machlett of management of
ELSI's operations, Raytheon and Machlett directed Mr. Rico Merluzzo to remain in the plant to protect the security
of the plant. Mr. Merluzzo remained in the plant unti! ELSI was forced to file its petition in bankruptcy.
Memoria!, Affidavit of Rico A. Merluzzo, Former Director of Planning, Raytheon-Elsi, 17 Apr. 1987 (Annex 21).
(31) Memoria!, Requisition Decree, Mayor of the Municipality of Palermo, 1 Apr. 1968 (Annex 33); Minutes
of Meeting in Palermo between Messrs. Joseph Oppenheim, Howard Hensleigh, Stanley Hillyer, and President
Carollo of Sicily, 19/2o Apr. 1968 (Annex 37); Memorandum from the President of the Sicilian Region, 20 Apr.
1968 (Annex -38).
(82) Memoria!, Annex 21, para. 19.
( 33) Memoria!, pp. 32-33.
( 34) In Aprii of 1968 ltaly proposed to lift the requisition order following the establishment of a special management
team of officials from ELSI, the Sicilian Region, and IRI to liquidate ELSI. However, this pian required
Raytheon to make additional capitai contributions to fund ELSI's continued operation, an option Raytheon and
Machlett had determined they could no longer pursue. In the summer of 1968 the Sicilian Region also proposed
a pian that would- have required Raytheon and Machlett to advance ali costs of ELSI's -operations without any
commitment on the.part of the Respondent as to the exact arrangements the Respondent would make for the sale
of ELSI's assets.
REPLICA DEL GOVERNO U.S.A. 133
Although the requisition was on its face limited to six months, the President of the Sicilian
Region stated to ELSI's stockholders on 19 Aprii, and confìrmed in writing on 20 Aprii, that
the requisition would continue as long as necessary to achieve the Respondent's objectives
regarding ELSI (86). With regard to Raytheon's and Machlett's ability to sell ELSI, President
Caro Ilo stated that:
« Nobody in ltaly shall purchase, that is to say IRI shall not purchase neither for a low
nor for a high price, the Region shall not purchase, private enterprise shall not purchase.
Let me add that the Region and IRI and anybody else who has any possibility to influence
the market will refuse in the most absolute manner to favor any sale while the plant is
closed.... In the event that the plant shall be kept closed, waiting for Italian buyers who
will never materialize, the requisition shall be maintained at least until the courts will have
resolved the case. Months shall go by (87) »,
Hence ELSI was deprived of income from the sale of its assets and was therefore no longer
able to meet its fìnancial obligations as they became due. Without any hope for a change in
this situation by the Respondent, Raytheon and Machlett certainly could no longer advance
funds to ELSI for its continued òperations. ELSI therefore was required under Italian law
to file a petition in bankruptcy on 26 Aprii 1968. The bankruptcy petition explicitly and accurately
stated that the reason for the bankruptcy was the requisition of the plant on I Aprii
1968 (88),
SECTION 2. -By Its Acts Subsequent to the Requisition, the Respondent Also Interfered with the
Bankruptcy Process to Its Own Advantage.
Following the fìling of ELSI's petition in bankruptcy, the Respondent continued to exploit
the situation in which the requisition had placed ELSI, thereby substantially aggravating the
fìnancial injury to Raytheon and Machlett. As a legai matter, the requisition prevented the
Trustee once be was appointed on 16 May by the bankruptcy court from selling the plant and
assets or otherwise protecting the property. Moreover, following the fìling of the bankruptcy
petition the Respondent allowed the local workforce to occupy the plant, which undoubtedly
discouraged prospective buyers and certainly made it difficult to show to interested buyers
the company's plant and other assets (39). Even after the requisition period ended, the bank-
(35) Counter-Memorial, p. 92. The Respondent also speculates that the failure to reach an agreement
between Raytheon and the Respondent was « an attempt [by Raytheon] to force the hand of the banks, which
had previously seemed reluctant to accept a negotiated solution •· Counter-Memorial, p. 92. This unsubstantiated
assertion must be rejected. Had the Respondent and IRI at any point made a concrete offer to acquire ELSI as
a going concern or share ownership with Raytheon and Machlett, Raytheon and Machlett would have acceded to
the plan. The failure to reach agreement was due not to the reluctance of Raytheon to reach a negotiated solution
to ELSI's problem. Raytheon had worked for more than a year for just such a resolution. Failure instead was
due to the Respondent's inability - or unwillingness - to commit to such a solution. See generally Memoria!,
Annex 22. Indeed, the Respondent's unsubstantiated assertion that it « did everything it could • to help ELSI
must be rejected for similar reasons. ,Counter-Memorial, p. 92.
(36) See generally Memoria!, Annexes 37, 38. The continued negotiations with the Respondent and the fact
that the appeal of the requisition was brought on 19 Aprii- only eighteen days after the requisition- did not
indicate that Raytheon considered the requisition « t<J be little more than a temporary nuisance •· CounterMemorial,
p. 92. On the contrary unti! the oral and written statements by the President of the Sicilian Region,
Raytheon believed that the order would soon be quashed. Although Raytheon and Machlett had been frustrated
by the Respondent's refusal to engage in meaningful cooperation, unti! 19 Aprii there were no indications that the
Respondent would sanction the continuance of illegal actions in its treatment of ELSI.
(37) Memorial, Annex 38.
(38) Memoria!, p. 15.
(39) The occupation should be distinguished from the pre-requisition strikes and sporadic sit-ins, a point
which the Respondent confuses. Counter-Memorial, pp. Bo, 83, 87. First, the strikes were directed at the Respon134
RASSEGNA DELL'AVVOCATURA DELLO STATO ------------------------
ruptcy court's lease of the plant by IRI (40) had the same effect. The Respondent proceeded to
obtain ELSI's work-in-process for a 'price below the value assigned by even the judicial
valuator (41).
In addition, the Respondent repeatedly and publicly announced its intention to take over
ELSI's plant through one of IRI's subsidiaries (42). Given the extensive power and dominance
of the Respondent in the commerciai environment of Italy, there can be little doubt that these
announcements deterred other buyers from bidding on ELSI's assets when the four auctions
were held by the bankruptcy court (48
). Notwithstanding its announced intentions, however, Elettronica
Telecomunicazioni, S.p.A. (« EL TEL »), the IRI subsidiary created to take over ELSI
boycotted the first three bankruptcy auctions, seeking to buy only some of the assets at a lower
price. Through a series of maneuvers which had the effect of controlling the sale of ELSI's
assets, the Respondent, through EL TEL, systematically acquired ELSI's operations on a
piecemeal basis, at the expense of ELSI's shareholders and creditors (44). Taking advantage
of the situation which it has created, IRI's subsidiary, Italtel, S.p.A., now uses ELSI's plant
tp manufacture telephone equipment - one of the new products proposed by ELSI in its
« I967 Report » to Italian officials (45).
On I I August I969, more than sixteen months after the appeal was filed, but only 40 days
after EL TEL had completed its acquisition of ELSI's assets, the Prefect ruled that the requisition
was illegal under Italian law.
dent, to persuade it to take action with respect to ELSI. Memoria!, Annex zx, para. zz. They were limited to
brief interruptions of production operations and did not result in the closure of the plant for an indefinite amount
of time. Only after Mr. Merluzzo left the premises following the filing of the bankruptcy petition did the workers
actually occupy the plant for a sustained period. 'ò
(40) Memoria!, pp. x8-x9.
(41) Memoria!, pp. 19-zo.
(42) Memoria!, Annexes 37, 38, 46.
( 48) That IRI's announcement was at the direction of the Respondent is confirmed in the Counter-Memorial,
p. 94·
(44) For a complete discussion of the bankruptcy process and EL TEL's systematic methods acquiring ELSI
at a price favorable to itself, see Memoria!, pp. x6-zo.
(45) Memoria!, p. :o~o.
PART III
JURISDICTION
Jurisdiction in this case is based on Artide 36(1) of the Statute of the Court, as read in
conjunction with Artide XXVI of the 1948 Treaty of Friendship, Commerce and Navigation
(the « Treaty ») between the United States and Itaiy (1). Although acceptance by the Respondent
of the Court's jurisdiction on this basis is not necessary, the Respondent « fully recognizes »
the Court's jurisdiction over this dispute as it reiates to the interpretation and application of
the FCN Treaty and its Suppiement (2).
The Respondent dedines to object to the Court's jurisdiction. Since Ruie 79 of the Ruies
of the Court requires that any objection to the jurisdiction of the Court be made within the
time Iimit fixed for the delivery of the Counter-Memoriai, the Respondent is now barred from
raising an objection. The Counter-Memoriai specuiates, however, that jurisdiction with respect
to Artides V(1) and (3) of the Treaty is in doubt because the United States has not put forward
these provisions previousiy in dipiomatic negotiations, in accordance with Artide XXVI (3).
The Respondent's view appears based on the fact that while these provisions were discussed
throughout the Memorandum of Law accompanying the 1974 Claim, they were not specifically
cited in the Memorandum's « Summary of Legai Arguments »,
The Respondent's view is wholly unjustified. The United States has repeatediy raised with
the Respondent since 1972 the legai daims now before this Court. Each Treaty daim argued
before this Court was presented to the Respondent in the Legai Memorandum submitted to the
Respondent in 1974 (4
). Since the Respondent has consistently refused to pay compensation
for the damages suffered by the United States, the dispute has not been satisfactorily adjusted
by dipiomacy and is now properly before this Court pursuant to Artide XXVI of the Treaty.
(l) Memorial, p. 25.
(2) Counter-Memorial, p. 95·
( 3) Artide XXVI of the Treaty states that disputes « which the High Contracting Parties shall not satisfactorily
adjust by diplomacy » may be submitted to the Court.
( 4) The daim presented to the Respondent in 1972 and again in 1974 appears in Volume I of the << Unnumbered
Documents », annex to the Counter-Memorial. The Memorandum of Law in Support of the Claim of
Raytheon Company and the Machlett Laboratories, Inc. Against the Government of Italy in Connection with
Raytheon-Elsi S.p.A. appears as Volume II of the 1972/74 daim. See pp. s, 21 (Artide III(2)); pp. 6, 23 (Artide
V(x)); pp. 5, 14, 51, and 73, (Artide V(z)); pp. 21, 23, and 51 (Artide V(3)); pp. 6, 25, and 74 (Artide VII);
pp; 6, 74 (Treaty Protocol paragraph 2); pp. 6, 10, 52, 74 (Treaty Supplement Artide x); pp. 7, 74 (Treaty
Supplement Artide V) (these page numbers refer to pages as originally numbered in the Claim).

PART IV
ADMISSIBILITY OF THE CLAIMS
The Respm:i.dent contends that the United States claim is inadmissible because Raytheon
and Machlett failed to exhaust available remedies in Italian courts. Raytheon and Machlett,
however, have exhausted in Italy all remedies available under ltalian law. Consequently the
United States claim is admissible before this Court.
In the Interhandel Case (l) this Court stated that in cases involving injury to a foreign national,
the principle of exhaustion of local remedies provides that the respondent State be given the
opportunity to redress the injury within its internai system. The Court explained that:
« Before resort rnay be had to an intemational court in such a situation, it has been considered
rtecessary that the State where the violation occurred should have an opportunity to redress
it by its own means, within the framework of its own domestic legai system (2) ,,,
In this case, the Respondent was accorded every opportunity within its own legai system
to pay compensation for the injury caused by its actions. Subsequent to the requisition, Raytheon
and Machlett directed ELSI officials to petition formally the Mayor to lift his order. When
this produced no result, Raytheon and Machlett directed ELSI officials to appeal the Mayor's
order to the Prefect of Palermo. While the decision by the Prefect was pending, Raytheon and
Machlett directed its representative on the creditors' committee to appeal decisions of the
bankruptcy judge, such as the decisions to lease the plant to EL TEL and to sell the plant,
equipment, and supplies to ELTEL. Unfortunately these appeals were denied by Italian
courts (3).
Eventually the Prefect declared the requisition to be unlawful (4). When the Mayor appealed
the Prefect's decision to the Italian Council of State and the President of Italy, the appeal was
dismissed and the Prefect's decision upheld (5).
Raytheon's and Machlett's interests as creditors of ELSI were represented in the bankruptcy
process by the Trustee, Giuseppe Siracusa. Following the decision of the Prefect that
the requisition was illegal, the Trustee brought suit against the Respondent seeking damages
for the unlawful requisition. After extensive consideration of the facts and law underlying the
injury to ELSI, the Court of Palermo refused to award darnages (6). Subsequently the Court
of Appeals of Palermo reversed the lower court in part a:nd found that damages were due for
the six-month « use ,, of the plant, but not for the injury caused in preventing Raytheon and
Machlett from placing ELSI through an orderly requisition (1). The Supreme Court of Appeals,
(l) Interhandel Case, Preliminary Objections, I.C.J. Reports I959, p. 27 (« Interhandel Case»).
(2) Interhandel Case, p. 27; see also Ambatielos Claim, u Reports of International Arbitral Awards, pp. n8-
uo (I956) (« Ambatielos Claim »); Finnish Shipowners Case, 2 Reports of International Arbitral Awards, pp.IS03-
I504 (I934).
(S) Memorial, Decree of the Civil and Criminal Tribunal of Palermo, 9 May I969 (Annex 64); Transcript
of Bankruptcy Hearing, Civil and Criminal Court of Palermo, I3 Jul. I969 (Annex 74).
(') Memorial, p. I 3·
(5) Memorial, p. 2I.
(6) Memorial, Judgment of the Court of Palermo, decided 2 Feb. I973, filed 29 Mar. I973, registered
4 Apr. I973, pp. Io-II (Annex So).
(1) Memorial, Judgment of the Court of Appeals of Palermo, registered 24 Jan. I974, p. I4 (Annex 81).
138 RASSEGNA DELL'AVVOCATURA DELLO STATO
after extensive consideration as to the facts and law of the case, upheld the decision of the Court
of Appeals of Palermo (B).
The Respondent asserts that after ali these efforts to seek redress from the Respondent,
Raytheon and Machlett should also have brought suit in Italian courts based on the Treaty (9).
The Respondent, however, does not describe the statutory basis on which such a suit could
be brought, undoubtedly because there is no basis for a suit under Italian law for compensation
based on Respondent's violation of the Treaty. Raytheon and Machlett should not be required
to pursue an unavailable local remedy prior to presentation of their claim by the United States
before this Court.
Treaties only can have effect within Italy if they are incorporated into an Italian legislative
act (1°). Even then, the treaty is only effective as a matter of Italian law for those provisions which
are complete in their essential elements; those provisions which lack completeness remain
ineffective (11). Although the Treaty and Supplement at issue here were incorporated into Italian
legislative acts (12), the provisions argued before this Court are not complete enough to permit
a suit for compensation by a United States national against the Government of Italy in Italian
courts (13). Indeed, although there is provision in Artide V for indemnification by the Government
of ltaly of those individuals or corporations w ho ha ve been deprived of their property,
that Artide is still not sufficiently complete. For example, there is no indication whether such
indernnification would be viewed as « diritto soggettivo " (subjective right), and therefore enforceable
in the ordinary courts, or « interesse legittimo >> (legai interest), and therefore enforceable
in the administrative courts. The other articles of the Treaty pleaded by the United States are
similarly not enforceable (14
). Further, since Raytheon's and Machlett's claims are those of
shareholders, Italian law would prevent a suit seeking compensation based on the illegal requisition
because Italian law reserves such a right to ELSI alone, despite the existence of the
Treaty (16). As stated by Elio Fazzalari, an esteemed Professar of Civil Procedure at the University
of Rome, « The Respondent's claim is groundless (16
) "·
Professar Antonio La Pergola, then Professar of Law at the University of Bologna and
subsequently President of the Italian Constitutional Court, considered in 1971 whether Raytheon
could sue based on the Treaty and concluded that further local remedies were not available.
Professar La Pergola stated that:
« ... I believe that I must conclude that in a situation of this kind, all the requirements
appear to be satisfied for the U.S. citizens who are members of Raytheon-Elsi S.p.A.
to be protected at the international level, without any internai remedies being explored
before the filing of a possible claim against the Italian Government (17) "·
The only Italian case cited by the Respondent in support of its argument is the 1961 case
of The Durst Manufacturing Co. v. Banca Commerciale Italiana (lB). Durst, however, merely
(B) Memoria!, Judgment of the Supreme Court of Appeals, 26 Apr. 1975 (Annex 82). The Supreme Court
of Appeals is not capable of reviewing de nova the facts as found by the lower courts.
(9) Counter-Memorial, p. 100.
(10) « Implementation of Treaties and Community Law », V Italian Yearbook of International Law, p. 265
(198o-81).
(11) ~ Implementation of the Peace Treaty with Italy », II Italian Yearbook of International Law, pp. 364-
365 (1976).
(12) Counter-Memorial, p. 1oo.
(13) Statement by Professar Elio Fazzalari, University of Rome, 29 Feb. 1988, p. 4 (Annex 2 to this Reply).
(14) Ibid., pp. s-6.
(15) Ibid., pp. 6-7.
(16) Ibid., p. 4·
(17) Letter from Antonio La Pergola, Professor at the University of Bologna, to Raytheon Company, 9 Dee.
1971 (Annex 3 to this Reply). Raytheon also sought the advice of its Italian counsel, Giuseppe Bisconti, who
informed Raytheon on 6 Nov. 1971 that << there is no remedy under Italian law available to the shareholders of
ELSI in relation to the damage suffered by them as a consequence of the requisition by the Mayor of Palermo and
the subsequent events ». Letter from Avv. Giuseppe Bisconti, Studio Lega! Bisconti, Rome, to Raytheon Company,
6 Nov. 1971 (Annex 4 to this Reply).
(18) 64 Rivista di Diritto Internazionale (1961), pp. II7-II8.
REPLICA DEL GOVERNO U.S.A. 139
holds that another provision of the Treaty - the << access to justice " clause - relieves a party
who files a petition for review by the Italian Supreme Court of the need for an authentication
of the signature of the Italian consul in New York by the Minister of Foreign Affairs. There
were no damages awarded in that case and it did not involve the Government of Italy.
Even if the Court believes that there was some possibility that a suit by Raytheon and
Machlett in Italian courts based on the Treaty would have succeeded, the principle of exhaustion
of local remedies does not require an injured national to pursue a highly speculative and unlikely
means of redress. The principle is satisfied if there is no effective local remedy « as a matter
of reasonable possibility (19) "· Indeed, the burden is on the Respondent to prove the existence
of a further .remedy in Italian courts (20). In this case, local counsel advised Raytheon that a
suit based on the Treaty could not succeed (21). Further, the Supreme Court of Appeals in Italy
had already decided the amount of compensation owed by the Respondent for its unlawful
actions (22). Therefore, obtaining compensation through a suit based on the Treaty was so
unlikely that it could not be considered a remedy available as a matter of reasonable possibility.
In any event, the Respondent is estopped from asserting that there exists any requirement
to further exhaust local remedies (23). Although for 15 years the Respondent entertained diplomatic
representations by the United States on the basis of the Treaty (including the formai
presentation of a diplomatic claim in 1974), at no time until the filing of its Counter-Memorial
did the Respondent suggest or request that Raytheon and Machlett enter Italian courts and sue
on the basis of the Treaty. Instead the Respondent made statements that it was willing to go
to arbitration with the United States (24), which discouraged further resort to Italian courts.
The United States has relied on the Respondent's representations in good faith to the United
States detriment because - assuming for the sake of argument that an action based on the
Treaty could be brought - the statute of limitations on that action has now expired (25).
Therefore, the Respondent is now estopped from assering that there should have been further
resort to local remedies by Raytheon and Machlett.
(19) Norwegian Loans Case, I.C.J. Reports 1957, p. 39 (separate opinion of Judge Lauterpacht); Barcelona
Traction Case, Second Phase, I.C.J. Reports 1970, pp. 144-145, and 284 (separate opinion of Judge Gros).
(20) Ambatielos Claim, p. 119.
( 21) Reply, Annex 3·
(22) Memoria!, Annex 82. Although the opinion of the Supreme Court is not binding outside the case in
which it is rendered, it is highly persuasive authority in subsequent cases in Italian courts. The Italian Civil Code,
op. cit., ix. No effective local remedy exists if further appeals to the courts are on issues previously decided by
the highest court. Panevezys v. Saldutiskis Railway, P.I.C.J., Series A/B, N. 76; X v. Austria, 30 International
Law Reports, p. 268.
(28) Estoppel is a generai principle of international law which this Court has previously employed to qualify
the rights of parties before the Court. E.g. Arbitra[ Award Made by the King of Spain on 23 December r9o6,
I.C.J. Reports p. 192, pp. 213-214 (where Nicaragua was not permitted to challenge the validity of an arbitrai
award in part because it had failed to raise any question with regard to the validity of the award over severa! years);
H. LAUTERPACHT, The Development of lnternational Law by the International Court, pp. 168-172 (1961) (« [Estoppel]
may fairly be regarded as a generai principle of law which, once more, is merely an affirmation of the mora! duty
to act in good faith »). As for the application of estoppel in the case of a bilatera! treaty, a member of this Court
has stated:
« The primary foundation of [ estoppel] is the good faith that must prevail in international relations, inasmuch
as inconsistency of conduct or opinion on the part of a State to the prejudice of another is incompatible with
good faith. Again I submit that such inconsistency is especially inadmissible when the dispute arises from
bilatera! treaty relations >>,
Temple of Preah Vihear Case, I.C.J. Reports r962, pp. 40, 42 (separate opinion of Judge Alfaro). For cogent
discussions of the issue of estoppel, see Bowett, << Estoppel before International Tribunals and its Relation to
Acquiescence », 33 British Yearbook of lnternational Law, p. 176 (1957); MacGibbon, « Estoppel in International
Law », 7 International and Comparative Law Quarterly, p. 468 (1958).
( 24) In response to the claim espoused by the United States in 1974 on the basis of the Treaty and customary
international law, the Respondent did not protest that local remedies had not been exhausted, but instead stated
that << the claim is juridically groundless, both from the international and internai point of view ». Aide-Memoire
of 1978 from the ltalian Ministry of Foreign Affairs to the United States. Fora summary of the diplomatic efforts
made to resolve this dispute, see Application Instituting Proceedings Submitted by the Government of the United
States of America, Attachment 2.
( 25) The norma! time period for filing of a suit in Italian courts seeking compensation for damages arising from
unlawful acts is five years from the date on which the act occurred. Italian Civil Code, op. cit., Artide 2947·

PART V
THE CLAIMS OF THE UNITED STATES
CHAPTER I
INTRODUCTION
Respondent's Counter-Memorial attempts to obscure the violations of the Treaty by
asserting inaccurate generaiities abòut the Treaty and by attributing to the United States arguments
that the United States does not make. The protections of the Treaty and the violations
of it by the Respondent, however, are quite clear from the ordinary meaning of each artide
invoked by the United States.
The United States has shown that the Respondent, through the actions of its agents and
officiais, violated its legai obligations under the Treaty by: (I) unlawfully requisitioning the
ELSI plant on I Aprii I968, (2) allowing ELSI workers to occupy the plant; (3) unreasonably
delaying ruling on the lawfulness of the requisition for I8 months until immediately after the
ELSI plant, equipment, and work-in-process had all been acquired by ELTEL; and (4) interfering
with the ELSI bankruptcy proceedings, which allowed the Respondent to realize its
previously expressed intention of acquiring ELSI, fora price far less than its fair market value.
All of these actions, singly and in combination, violated Articles III, V, and VII of the
I949 Treaty and Artide I of its I96I Supplement, which by its terms is an integrai part of the
Treaty. The protections provided under the Treaty relating to this dispute fall into four categories:
(a) protection from interference with Raytheon's and Machlett's management and
control of ELSI;
(b) protection from impairment of Raytheon's and Machlett's investment rights;
(c) protection from the wrongful taking of Raytheon's and Machlett's property; and
(d) protection and security for Raytheon's and Machlett's investment.
Before addressing these four areas of protection under the Treaty, however, three generai
assertions by the Respondent in the Counter-Memorial must be addressed as a preliminary
matter.
First, a specific object and purpose of this Treaty was to encourage investment by corporations
of one party in the territory of the other party (l). The United States does not argue
that the sole purpose of the Treaty is to encourage investment (2), but certainly the articles
(1) As noted in the Memoria!, when the Respondent debated the merits of the Treaty, one factor that
weighed in its favor was the « urgent need » of its economy for foreign capitai. Memoria!, p. 27.
(2) The Respondent itself agrees that the encouragement of investment was one of the aims of the Treaty.
Counter-Memorial, p. 103. Some other treaties of Friendship, Commerce, and Navigation (<< FCN ») entered into
by the United States subsequent to this Treaty contain within their preamble a reference to the promotion of
investment, but the object and purpose of ali of these treaties are seen in their substantive provisions, which
are largely identica! and which ali provide investment protections for corporations. Of course treaties create
neither rights nor duties for third States. See 1969 Vienna Convention on the Law of Treaties, Article 34·
J()
142 RASSEGNA DELL'AVVOCATURA DELLO STATO
advanced before this Court show that both parties were concerned with the property and interests
therein of each party's corporations in the territory of the other. The 1961 Supplement, which
constitutes «an integrai part >> of the Treaty (3), states in its preamble that the United States
and Italy were « desirous of giving added encouragement to investments of one country in useful
undertakings in the other country (4) )), The use of the word « added >> shows that the originai
Treaty envisioned protection of investment (5). To accept the Respondent's implied argument
that the Treaty does not provide protection for United States investments in Italy would eviscerate
large sections of the Treaty.
The emergence in recent years of bilatera! investment treaties (« BITs ))) between the United
States and developing countries is not relevant when interpreting this Treaty's protections
for investments. BITs specifìcally address just investment issues rather than establish a comprehensive
network governing both investments and other matters (6). There is no reason why
a later series of treaties with other countries dealing specifìcally with investment should weaken
the provisions of this Treaty with Italy, which deals with investment and other matters.
Second, the Respondent incorrectly asserts that the only standards operating under this
Treaty are a national treatment standard and a most-favored-nation standard. The ordinary
meaning of the Treaty artides at issue in this dispute belies the Respondent's assertion. For
instance, Artide I of the Supplement establishes an unqualifìed rule prohibiting arbitrary and
discrirninatory conduct that prevents effective control and management by United States
corporations of their subsidiaries in Italy or impairs their investments in those subsidiaries.
Artide V of the Treaty establishes an unqualifìed rule that property of United States corporations
shall not be taken without due process of law and without just compensation. Artide III of
the Treaty also establishes a virtually unqualifìed rule permitting United States corporations
to organize, manage, and control Italian corporations, subject only to certain guidelines under
Italian law. In Artide VII of the Treaty, there is a standard of reciprocity which requires the
Respondent to allow United States corporations operating in Italy the same freedom to dispose
of their immovable property or interests as is given to Italian corporations in the United States.
The operative standard of treatment must be analyzed for each of the artides advanced by the
United States.
Third, the Respondent is incorrect in implying that the United States' daim depends upon
ELSI being a benefìciary under the Treaty. The Treaty provisions at issue specifìcally protect
the rights, interests, and property of United States corporations such as Raytheon and Machlett,
which invested in the ltalian economy by means of an Italian subsidiary. The rights, interest,
(B) Treaty Supplement, Artide IX. The Vienna Convention on the Law of Treaties,·Article 31(3), also
provides that any subsequent agreement between the parties shall be taken into account when interpreting the
Treaty.
(4) Treaty Supplement, Preamble (emphasis added). As stated in the ratification bill passed in Italy, « The
Supplemental Agreement ... is designed above all to foster investment in Italy using private capital from the
United States which is the most important, perhaps the only, country today which has such resources at its disposal
». Counter-Memorial, Annex 9, p. 10. (Materials from the Italian interna! ratification proceedings are
cited in this Reply to demonstrate that the two parties had a common understanding of the meaning and purpose
of the Treaty. Standing alone, such interna! ratification proceedings cannot, of course, bind another party).
This Court has previously used the preamble of a treaty to establish its object and purpose. Case Concerning
Rights of Nationals of the United States, judgment, I.C.j. Reports I952, p. 24.
(5) Application of the Treaty provisions will not accentuate an << imbalance » between the Parties. CounterMemorial,
p. 103. Even if it can be said that United States investments in Italy predoininate the two parties'
economie relationship, the Respondent agreed to this Treaty not just to protect the ability of Italians to invest
in the United States, but to secure for the Italian economy the benefits of United States capital in Italy. In
this sense, the Italian « gain » under the Treaty predoininates that of the United States. Whether one party benefits
at any given time more than the other party is irrelevant to the agreement of each party to abide by the provisions
of the Treaty.
( 6) The United States has negotiated BITs with Panama, Senegal, Haiti, Zaire, Morocco, Turkey, Cameroon,
Bangladesh, Egypt, and Grenada. None of these treaties is yet in force. The BITs draw on concepts of protection
which were developed in the FCN treaties subsequent to World War II. Any greater specificity of investment
protections in the BITs are attributable to innovations that address concerns particular to investments in developing
countries. P. GANN, << The US Bilateral lnvestment Treaty Program », 21 Stanford journal of International
Law, pp. 373-374 (198s).
REPLICA DEL GOVERNO U.S.A. 143
and property affected by the Respondent's actions belonged to Raytheon and Machlett, not
ELSI (1). In the Case Concerning the Barcelona Traction, Light, and Power Company, Limited,
the Court recognized that whether particular rights and interests of shareholders are protected
as a matter of internationallaw may be governed in a particular case by the rules of an applicable
international instrument (8
). The nature of the right, interest, or property at issue in this case
is clear from the ordinary meaning of the Treaty provisions that apply within each category
of protection. Those categories of protection are now discussed separately in light of the CounterMemorial.
(7) The argument of the United States before the United States Supreme Court in Sumitomo Shoji America,
lnc. v. Avigliano, cited in the Counter-Memorial p. xo6, is not relevant to this case. In Sumitomo the United
States argued that the United States subsidiary of a J apanese corporation was not capable under the particular
language of Artide VIII( x) of the United States-Japan FCN Treaty to avoid application of United States federai
law. That case dealt with language particular to Artide VIII( x) of that FCN Treaty. Further, Sumitomo did not
discuss in any way the right of Japanese corporations to raise claims under that FCN Treaty in United States courts.
(B) judgment, Second Phase, ICi Reports I970, paras. 54, 6x, 62.
CHAPTER II
INTERFERENCE WITH MANAGEMENT AND CONTROL OF ELSI
The Respondent requisitioned the ELSI plant, delayed its decision as to the lawfulness
of the requisition, and thwarted the normal bankruptcy process, instead of allowing an orderly
liquidation of ELSI. These acts constitute interference with Raytheon's and Machlett's management
and contro! of their subsidiary. Artides III and VII of the Treaty and Artide I of
the Supplement bar the Respondent from engaging in such interference.
SECTION x. - Article III of the Treaty.
Artide III of the Treaty guarantees that United States corporations may participate in
corporate enterprises organized under the laws of Italy. Artide III(z) creates a broad right
for United States corporations to "organize, contro! and manage >> Italian corporations engaged
in commerce and manufacturing in conformity with applicable Italian law and regulations (9
).
The facts of this case vividly show a denial of this right to contro! and manage. The Respondent,
however, tries to avoid application of the ordinary meaning of Artide III(z) by making severa!
incorrect assertions.
First, the Respondent contends that the unlawful requisition of the ELSI plant in « no
way affected contro! by the shareholders » over ELSI, but rather << merely concerned the management
by [ELSI] of some property belonging to [ELSI] (1°) ». Yet a fundamental right of
shareholders in controlling and managing a non-public corporation is the right to decide to
liquidate or « wind up » the business of that corporation. Under Artide 17 of the By-Laws
of ELSI, the right « of changing the legai nature of the Company, of winding up voluntarily
the Company » was reserved exdusively to shareholders owning shares having an aggregate
value of 90 percent of the capitai of ELSI (11). Mter having made extensive investments in ELSI,
Raytheon and Machlett alone had the right and the responsibility to decide to liquidate ELSI
in an orderly fashion.
Second, the fact that the requisition did not transfer ownership of ELSI to the Respondent (12)
does not make the requisition any less of an interference with management and contro!. The
requisition deprived any potential buyer of access to ELSI's physical assets, thereby making
(9) Article III(2) of the Treaty states in part:
« The nationals, corporations and associations of either High Contracting Party shall be permitted, in conformity
with the applicable laws and regulations within the territories of the other High Contracting Party,
to organize, control and manage corporations and associations of such other High Contracting Party for
engaging in commerciai, manufacturing, processing, mining, educationa!, philanthropic, religious and scientifìc
activities ~ (Emphasis added).
(10) Counter-Memorial, p. 105. Contrary to the Respondent's assertion, the United States is not establishing
an« autonomous principle of fair treatment >>. Counter-Memorial, pp. ros-1o6. The United States simply points
out that the Treaty as a whole seeks to assure investors that investments will be given fair or equitable treatment.
Memoria!, p. 30. The concern with equitable treatment is expressly stated in the Preamble to the Supplement,
which of course constitutes an integrai part of the Treaty. See Treaty Supp!ement, Artide IX. The existence
of other standards of treatment such as national treatment and most-favored-nation treatment does not preclude
application of fair treatment.
(11) ELSI - Elettronica Sicula S.p.A., By-Laws (Articles of Incorporation), Approved by the Shareholders
Extraordinary Meeting of 19 Ju!y 1961, Artide 17 (Annex 5 to this Reply).
(12) Counter-Memorial, p. III. ·
REPLICA DEL GOVERNO U.S.A. 145
sale of ELSI as a going concern impossible. When President Carollo of Sicily informed Raytheon
orally and in writing that the requisition would be prolonged inde:finitely unless Raytheon
abandoned its pianto wind up ELSI (13), it was dear that Raytheon and Machlett had completely
lost their ability to manage and control ELSI, leaving them only the option of placing ELSI
in bankruptcy as required by Italian law (14
). Ultimately the interference by the Respondent
in the bankruptcy process even diminished the right of Raytheon and Machlett to receive any
of the benefìts of a normal bankruptcy sale, thereby forcing Raytheon and Machlett to pay
off a greater share of ELSI's guaranteed debts that went unpaid due to the low proceeds from
the bankruptcy. Whether or not the requisition involved transfer of title, it obviously involved
interference with management and contro!.
Third, the Respondent seeks to justify its conduct under the fìrst sentence of Artide III(2)
by asserting that the requisition was based on an Italian law and therefore was in<< conformity
with the applicable laws and regulations ». Yet while that dause permits United States corporations
to organize and control Italian corporations only within the guidelines established by
locallaw, it does not call for United States corporations to receive treatment «no less favorable >>
than that accorded to corporations owned by local nationals, which is the dause used in the
Treaty to trigger a national treatment standard (1 6). Consequently the « applicable laws and
regulations » dause m:ust be interpreted to mean that the way in which management and control
may be exercised is subject to regulation under locallaw, but the right to manage and control
may not be abrogateci entirely, regardless of the treatment accorded to ltalian nationals (16).
Subject only to this constraint, the guarantee of treatment in the fìrst sentence of Artide
III(z) is unqualifìed. Unqualifìed or << absolute » rules are used in FCNs to protect vital rights
and privileges of foreign corporations in any situation, whether or not a host government provides
the same rights to its own population (17).
In any event, the « applicable laws and regulations » dause cannot excuse the Respondent's
conduct in this case because the requisitiort of the plant bythe Respondent was not in conformity
with applicable laws and regulations. The Prefect of Palermo found the requisition to be illegal
because it was not directed toward the goal stated by the Mayor of Palermo. The highest ltalian
court confìrmed the Prefect's fìnding. To be in conformity with applicable laws and regulations,
it is not enough that the Mayor of Palermo referenced certain laws when he requisitioned the
plant. If mere reference to local laws satisfìes Artide III(z), then all acts of the Respondent
could be excused in this way and the protection of Artide III(2) would be rendered meaningless.
Even if the fìrst sentence of Artide III(z) is read as providing for treatment no less favorable
than is provided to Italian corporations, the presumption must be that this Artide was not
meant to deprive United States corporations of advantages they would have otherwise enjoyed
(18) Memoria!, pp. 13-14.
(14) Memoria!, pp. 14-15, 3o-32.
(16) The <• no less favorable » clause appears in various parts of the Treaty where a national treatment standard
is intended. The clause also appears in the second sentence of Artide III(2), but this sentence applies to corporations
controlled by corporations in the other party. Hence, Article Ill(2) applies a national treatment standard
to the rights and privileges of ELSI to engage in activities in ltaly, but not to the rights of Raytheon and Machlett
to contro! and manage ELSI.
(16) Herman Walker, a highly qualified writer in this area who was intimately involved in the negotiation of
many FCNs, noted that the phrase « in conformity with applicable laws and regulations », as it occurs in this Treaty,
<< is framed in such a manner as to imply that it does not constitute a reservation detracting from the treaty right;
and such phraseology has been omitted from subsequent treaties >>. H. WALKER, « Provisions on Companies in
United States Commerciai Treaties », so American journal of International Law, p. 373 at p. 384, N. 53 (1956).
In view of the possible ambiguity of this qualification, however, the Supplementary Agreement provided stronger
protection by absolutely prohibiting arbitrary and discriminatory interference, whether or not in accordance with
local law. See infra, Part V, Chapter II, Section 2.
(17) H. WALKER, << Modern Treaties of Friendship, Commerce and Navigation », 42 Minnesota Law Review,
p. 8os at pp. 81 I, 823 (1958). Mr. Walker states that in these situations foreign nationals are to receive « not only
equa! protection, but also a certain tninimum degree of protection, as under international law, regardless of a
Government's possible lapses with respect to its own citizens. » H. WALKER, « Treaties for the Encouragement
and Protection of Foreign Investment: Present United States Practice », 5 American journal of Comparative Law,
p. 229 at p. 232 (1956). Unqualified rules state the law of the treaty itself and may be assessed, as relevant, in
accordance with principles of international law.
146 RASSEGNA DELL'AVVOCATURA DELLO STATO
--------------------~~ ~--------------------------
under international law (18). Hence Artide III(2) indudes certain mm1mum standards of
protection under intemational law, induding protection from unlawful interference with management
and control (19).
Thus, under either the standard set forth in Artide II1(2) or even under a national treatment
standard, unlawful interference in the management and control of a United States-owned
subsidiary violates Artide III(2) of the Treaty.
SECTION 2. - Article I of the Supplement.
Artide I(a) of the Supplement guarantees that United States corporations shall not be
subject to arbitrary or discriminatory measures in Italy resulting particularly in preventing
their effective control and management of enterprises which they have been permitted to establish
or acquire in Italy (2°). This provision complements and reinforces the protections accorded
to Raytheon and Machlett under Artide III by establishing a completely unqualified rule (21)
prohibiting interference with control and management by arbitrary and discriminatory conduct,
regardless of Italian laws and regulations.
The Counter-Memorial strains to interpret the Respondent's actions as being directed
only at ELSI and therefore as having no effect on Raytheon and Machlett's property (22). Yet
Artide I(a) of the Supplement does not referto property at all; it refers to control and management
of enterprises established or acquired in Italy, which is precisely what is at issue here.
Raytheon and Machlett were most certainly « subjected to » measures in Italy << resulting in »
the prevention of their effective control and management of ELSI. The Respondent pretends
that « the company organs, through which this control and management were performed, were
able to function freely also during the period of the requisition (23) ». The « company organs »
could still function, but there was nothing left for them to control and manage. This is precisely
what Artide I(a) of the Supplement was designed to prevent (24).
(18) H. P. CONNELL, « United States Protection of Private Foreign lnvestment through Treaties of Friendship•
Commerce, and Navigation », 9 Archiv des Volkerrechts, p. 256 at p. 266 (I96I-62) (quoting Schwarzenberger
at note 49: « Even if the standard of national treatment is laid down in a treaty, the presumption is that it
has been the intention of the parties to secure to their nationals in this manner additional advantages, but not to
deprive them of such rights as in any case, they would be entitled to enjoy under international customary law or
the genera! principles of law recognized by civilized nations »).
(19) When a State admits into its territory foreign investments in the form of juristic persons, that State is
bound to extend to them the protection of the law and assumes obligations concerning the treatment to be afforded
to them. Such obligations include the obligation to refrain from acts that deprive investors of the right to
exercise management and contro! of their investment. See, e.g., Revere Copper and Brass, !ne. v. Overseas Private
lnvestment Corporation, 56 International Law Reports, p. 258 at pp. 290-293, 295 (I98o). The unlawful interference
with Raytheon's and Machlett's management and contro! by the Respondent was a breach of its obligations
under customary internationallaw as preserved by the Treaty.
(20) Artide l(a) of the Supplement states:
« The nationals, corporations and associations of either High Contracting Party shall not be subjected to arbitrary
or discriminatory measures within the territories of the other High Contracting Party resulting particularly
in: (a) preventing their effective contro! and management oj enterprises which they have been permitted
to establish or acquire therein ... & (Emphasis added).
(21) See supra, note I7 and accompanying text.
(22) Counter-Memorial, p. II2. The Respondent's reading of this artide runs counter to its asserted acceptance
of the rules of interpretation set out in Artides 3I and 32 of the Vienna Convention on the Law of Treaties.
Counter-Memorial, pp. I07-Io8. The United States agrees that the rules of the Vienna Convention apply to
the interpretation of this Treaty. The ordinary meaning of Artide l(a) as well as the other provisions cited by
the United States establishes the Respondent's wrongful conduct. Further the ordinary meaning of these
provisions is the proper meaning within the context of the Treaty as a whole and in light of its object and purpose,
which indudes the promotion and protection of foreign investment. lf reference to supplementary means of
interpretation is necessary, in accordance with Artide 32, these too confìrm the interpretation of the Treaty provisions
advanced by the United States.
(23) Counter-Memorial, p. II2.
(24) At the time of the ratifìcation of the bill introduced to implement the Supplement, the Respondent noted
that « the fìrst part of the [ Supplement], which is certainly the most important, refers to the free transfer of capitai
and income by natura! and corporate persons from the two contracting States, and their freedom to manage the
companies which these natura! or legai persons establish or procure ». Counter-Memorial, Annex I I, pp. 20-21.
REPLICA DEL GOVERNO U.S.A. 147 ---------------------------------
The Counter-Memorial tries to avoid Artide I(a) by arguing that the requisition was not
arbitrary because « arbitrary " means the same as << unreasonable >> and the requisition was a
reasonable step to take to deal with an emergency. The requisition was both arbitrary and
unreasonable regardless of the problems of « social unrest >> alleged by the Mayor of Palermo
and used as the pretext for the requisition (25). First, both the Prefect of Palermo and the Italian
courts declared that the requisition was an unlawful act. An unlawful act is not a reasonable
act under any system of legai obligations. Indeed the Prefect himself found that the law was
« destitute of any juridical cause which may justify it or make it enforceable " and could not
achieve the asserted objective of alleviating social unrest (26). Second, the subsequent fate of
ELSI shows that once the Respondent requisitioned the plant, the Respondent took absolutely
no steps to alleviate the « social unrest "• such as by reopening the plant. The goal expressed in
the requisition order was not obtainable by the act he took and was therefore arbitrary.
Third, even if the Respondent's actions were reasonably related to the goal stated, requisitioning
a plant for politica! reasons is not a legally permissible goal under the Treaty. Indeed, the
Respondent was completely unresponsive to Raytheon's and Machlett's efforts to stabilize
ELSI financially, precipitating the conditions which led to the « social unrest "· The real
purpose of the requisition was not to stem « social unrest "• but to wrest control of ELSI's plant,
equipment, and assets from its rightful shareholders, Raytheon and Machlett. That purpose
was arbitrary. ·
The existence of Italian laws which in some situations allow the Mayor of Palermo to requisition
property does not make reasonable the improper and arbitrary application of those laws.
Municipallegal systems, including those of Italy and the United States, and principles of internationallaw,
recognize that where the means employed do not fit the expressed goal, or are
legally impermissible, then those means are arbitrary and unreasonable (27). Within the context
of the Treaty itself, which has as an objective the promotion of investment, the actions of the
Respondent in seizing Raytheon's and Machlett's investment are also unreasonable and arbitrary.
The Respondent contenda that the requisition was not discriminatory because requisitions
of this kind frequently ha ve been used with regard to plants belonging to I talian-owned companies.
The Treaty, however, envisions protection from notjust discrimination against foreign companies,
but also from discrimination in favor of Government-controlled enterprises (28). It is not
sufficient to point to other requisitions where the Respondent also took over companies that
were competitive with its own. Therefore at the time that Raytheon and Machlett invested
in ELSI, and at the time this requisition occurred, Italian corporations apparently had never
been treated in this fashion, and therefore the requisition may be said to be discriminatory.
SECTION 3· - Artide VII of the Treaty.
Further protection against interference with management and control is given by Artide
VII of the Treaty. Artide VII states that a United States corporation is entitled to acquire,
own, and dispose of its immovable property or interests therein in Italy on terms no less favorable
than those accorded to Italian corporations by the state of the United States under which the
United States corporation is created (29
).
(25) Counter-Memorial, p. 83.
( 26) Memoria!, Judgment of Prefect of Palermo, 22 Aug. 1969, p. 11 (Annex 76). See Memoria!, p. :n.
The Prefect found that the requisition could not possibly have achieved its stated purposes, because the requisition
could not result in the re-employment of the workers or in the continued operation of the plant.
( 27) Memoria!, pp. 34-36.
(28) See, e.g., Artide XVIII of the Treaty and Paragraph 2 of the Protocol.
(29) Article VII of the Treaty states in part :
~ The nationals, corporations and associations of either High Contracting Party shall be permitted to ..
dispose of immovable property or interests therein within the territories of the other High Contracting
Party upon the following terms:
·················································· .......................... ·················· (b) in the case of nationals, corporations and associations of the United States of America, the right to
148 RASSEGNA DELL'AVVOCATURA DELLO STATO
The Respondent contends that since the plant and assets belonged to ELSI, the only
property to which Artide VII could apply is the shares in ELSI held by Raytheon and Machlett;
since Raytheon and Machlett were free to dispose of their shares at ali times, Artide VII was
not violated. Even if the protections of Artide VII were limited to the shares, the value of
Raytheon's and Machlett's shares was essentially reduced to nothing. Prior to the requisition,
the shares had a value reflecting ELSI as a going concern, and the shareholders could control
and manage fundamental changes in the status of ELSI, such as an orderly liquidation. After
the requisition, however, Raytheon and Machlett were only «free» to dispose of their shares
by declaring ELSI bankrupt and by paying portions of ELSI's guaranteed debts that would
have been paid from proceeds of an orderly liquidation.
Yet Artide VII is actually concerned with « immovable property or interests therein ».
« Interests ll in property is a phrase sufficiently broad to include indirect ownership of property
rights held through a subsidiary that is not a United States corporation (30). Raytheon's and
Machlett's interests in ELSI's plant, equipment, and work-in-process were obliterated by
the unlawful requisition and subsequent treatment in the bankruptcy process. The fact that
the requisition period was for six months is irrelevant since Raytheon and Machlett, facing
no prospect of an orderly liquidation, were forced to have ELSI declared bankrupt within the
first month of the requisition.
The standard of treatment operating in Artide VII is one of reciprocity. A national treatment
standard is applied only if the reciprocity standard is higher than the standard of national
treatment. To establish the reciprocity standard of treatment, the United States has shown
that under both Delaware and Connecticut law, corporations may be dissolved and their assets
sold pursuant to determinations of their boards of directors and shareholders (81). If Delaware
or Connecticut were to interfere substantially with a parent corporation's right to dissolve its
subsidiary, even if for a lawful public use, it would be obligated to pay compensation for that
property (32). The Respondent has not shown that this standard of treatment is higher than that
accorded by the Respondent to its own corporations. Unless the Respondent can show that
it may illegally requisition a wholly-owned subsidiary of an Italian corporation, without paying
compensation to that corporation, then the standard of reciprocity applies.
acquire, own and dispose of such property upon terms no less favorable than those which are or may hereafter
be accorded by the states, territory or possession of the United States of America ... under the laws of which
su eh corporation or association is created or organized, to ... corporations ... of the Italian Republic; provided
that the ltalian Republic shall not be obligated tq accord to nationals, corporations and associations of the
United States of America rights in this connection more extensive than those which are or may herafter
be accorded within the territories of such Republic to nationals, corporations and associations of such
Republic ».
( 30) Starrett Housing Corp. et al. v. Islamic Republic of Iran, Awd. N. 314-24-1, p. 124 (14 Aug. 1987);
Amoco International Finance Corp. v. Government of Iran, Partial Awd. N. 310-56-3, p. 47-48 (14 July 1987);
Sedco !ne. v. National Iranian Oil Company, Awd. N. 309-129-3, p. 22-23 n. 9 (7 July 1987) (« The term
' interests in property ' clearly is broad enough to encompass property owned indirectly through subsidiary
corporations »).
(31) Memoria!, pp. 37-38.
(32) The duty to compensate extends beyond property rights taken solely pursuant to a formai expropriation
decree. Memoria!, p. 38.
CHAPTER III
IMPAIRMENT OF INVESTMENT RIGHTS AND INTERESTS
The previous chapter concerned Treaty prov1s10ns that protected investors' rights in
managing and controlling their investment. This chapter concerns an equally significant protection
against measures that impair the value of that investment. Artide l(b) of the Supplement
provides that United States corporations shall not be subjected to arbitrary and discriminatory
measures in I taly which result particularly in impairing either their legally acquired rights
and interests in Italian enterprises or their investments (83). Specifically, the Supplement protects
against impairment of rights, interests, and investments «in the form of funds (loans, shares,
or otherwise) >>,
This broad language envisions protection of all financial commitments made for the benefit
of ELSI, whether in the form of direct capitai contributions, loans, loan guarantees, or open
accounts (84). Further, the financial loss incurred by Raytheon in defending the suits brought
by Italian banks subsequent to the Respondent's arbitrary measures is also within the scope
of the Supplement because that loss represents a burden on or impairment of Raytheon's legally
acquired interests in ELSI (36). The requisition ofthe plant, which caused Raytheon and Machlett
to place ELSI in bankruptcy, and the subsequent acquisition of the plant, assets, and workin-
process of ELSI, dearly impaired investment rights and interests in ELSI. The requisition
prevented voluntary liquidation of ELSI and caused it to file for bankruptcy. The impairment
continued with the subsequent conduct of Italian officials in a series of concerted actions to
acquire for EL TEL the ELSI plant and assets a t less than fair market value, leaving Raytheon
to pay ELSI's outstanding guaranteed debts and to defend lawsuits brought by ELSI's unsecured,
unguaranteed debtors (36).
Once again the Respondent argues that the property of Raytheon and Machlett was not
actually affected by the requisition because it was addressed to ELSI (37). But Artide l(b) of
the Supplement does not protect against just direct seizure of tangible property belonging to
United States investors; it prohibits arbitrary and discriminatory measures which « impair"
United States corporation's rights and interests in and loans to Italian entities (38). Clearly
Raytheon's and Machlett's rights and interests were impaired. Acceptance of the Respondent's
argument would eviscerate the ordinary meaning of this artide.
(83) For a discussion of the arbitrary and discriminatory nature of the Respondent's acts, see supra, Part V.
Chapter II, Section z.
(34) The Respondent seeks to differentiate between such financial commitments, Counter-Memorial, p. II4,
but there is no basis in the language of the Treaty for doing so. Loan guarantees represent as much of a financial
commitment as any direct loan, especially where, as in this case, the guarantor actually has to pay off the loan.
The Respondent itself has recognized that investments wlùch are eligible for protection include equity interests
in the form of loan guarantees. See Operational Regulations of the Multilateral lnvestment Guarantee Agency,
Article 1.04(vi), signed by Italy on 17 Feb. 1986.
( 35) Memoria!, p. 40.
(36) Memoria! at pp. 41-43.
(37) Counter-Memorial, p. nz.
( 88) The ordinary meaning of « impair • suggests a wide scope of protection. This interpretation comports
with the desire of Italy in negotiating the Supplement << to remove any obstacles to the inflow of private American
capitai ... t. ltalian Annex 9, p. 3·
CHAPTER IV
WRONGFUL TAKING OF INTERESTS IN PROPERTY
The Treaty also protects against government taking of property without compensation.
Artide V(2) of the Treaty provides that property of United States corporations within Italy
shall not be taken without due process of law and without the prompt payment of just and
effective compensation (39). Paragraph I of the Protocol to the Treaty provides that the provisions
of Artide V(2) shall « extend to interests held directly or indirectly » by United States corporations.
Both the Respondent's act of requisitioning the ELSI plant and its subsequent acts in
acquiring the plant, assets, and work-in-process singly and in combination constitute takings
of property without due process of law or just compensation.
The Respondent agrees that Artide V(2) accords protection to United States corporations
against the taking of property. and agrees that this protection was extended by the Protocol
to interests held directly or indirectly by a United States company (4°). Yet despite unambiguous
language to the contrary, the Counter-Memorial implies that the standard of protection in the
Protocol given to « interests held directly or indirectly » is somehow different than the standard
of protection given to property in Artide V(2) of the Treaty (41). This is contrary to the explicit
language of the Protocol which states:
« The provisions of paragraph 2 of Artide V, providing for the payment of compensation,
shall extent to interests held directly or indirectly by ... corporations ... of either High
Contracting Party in property which is taken within the territories of the other High Contracting
Party».
There is no mention in the Protocol of any different standard of protection from that which
exists in Artide V; to the contrary, the Protocol << extends » Artide V(2). The wealrness of the
Respondent's interpretation is further made evident in that the Respondent does not even try
to establish what this different standard is or whether the standard was met in the treatment of
Raytheon and Machlett.
The Counter-Memorial also asserts that Paragraph I of the Protocol accords protection
« only to rights to property " because the Italian text of the Protocol uses the word << diritti »
(which can be translated as << rights >>) and Vienna Convention Artide 33(4) requires application
of the more restrictive meaning (42). Although << interests >> properly reflects the meaning of
<<diritti>> in the Protocol (43), i t must be recognized that the Protocol extends Artide V to interests
(or under the Respondent's interpretation << rights ») << held directly or indirectly >> by Raytheon
and Machlett. Therefore it is dear that indirect rights to property are also protected (44).
1The Respondent denies that the requisition of the ELSI plant can be considered an << expropriation
>> or << taking >> of property, since it was simply a << requisition in use >> for which the M uni-
(39) Artide V(2) of the Treaty provides that:
« The property of nationals, corporations and associations of either High Contracting Party shall not be
taken within the territories of the other High Contracting Party without due process of law and without
the prompt payment of just and effective compensation ~ (Emphasis added).
(40) Counter-Memorial, p. 109.
(41) Counter-Memorial, p. 109.
(42) Counter-Memorial, p. 109.
( 43) <<Diritti~ is also translated as << interests >l in other parts of the Treaty, such as Artide Vl1(1) (a).
( 44) The Respondent's reliance on Artide 34(3) of the Vienna Convention on the Law of Treaties is also
misplaced. By its terms Artide 33(4) should not be used unless interpretation in accordance with Artides 31
and 32 does not resolve the difference of meaning. An analysis under Articles 31 and 32 of the meaning of
t diritti t shows that the Protocol, placed in context as an extension of Artide V, goes beyond the protection
REPLICA DEL GOVERNO U.S.A. 151
cipality of Palermo received no financial benefì.t (45
). Yet a '' taking » is generally recognized as
including not merely outright expropriation of property (46), but also unreasonable interference
with its use, enjoyment, or disposal (47). The requisition of the plant prevented an orderly
liquidation of ELSI, thereby causing Raytheon and Machlett to piace ELSI in bankruptcy.
The Respondent then proceeded through EL TEL to acquire the ELSI plant and assets for less
than fair market value. Consequently the Respondent's acts so substantially interfered in the
use and disposal of Raytheon's and Machlett's indirect interests in the ELSI property that a
taking occurred. This taking gave rise to a right to compensation.
Whether the Municipality of Palermo ultimately gained from the action of its Mayor is irrelevant.
The Treaty does not require that the Respondent benefit from its taking; it is sufficient
that Raytheon and Machlett were deprived of the use and disposal of their interests in ELSI.
In any event, the Respondent gained considerably from this requisition because it prevented
an orderly liquidation of ELSI and led to EL TEL's acquisition of ELSI's plant, assets, and
work-in-process for far less than EL TEL would have had to pay had there been no interference.
nccorded in Artide V to direct property rights. Therefore the Protocol seeks to protect << interests >> in property,
not just « rights ~ in property, since « rights » in property are already protected by Artide V. Even if resort to
Artide 33(4) of the Vienna Convention is necessary, that Artide does not calJ for application of the most
restrictive meaning, but rather the application of the meaning which J:>est reconciles the two texts, having regard
to the object and purpose of the Treaty. Both international courts,' e.g., Wemhoff Case [1968] Pub. Eur. Ct.
of Human Rights, Ser. A (Judgment of 27 June 1968), and even Italian courts, e.g., Ministero della Difesa v.
Societa Rimorchiatori Napoletani, Cassazione, 9 Dee. 1974, N. 4106, pp. 307-309, have rejected the approach
taken here by the Respondent.
(46) Counter-Memorial, pp. 83, 109.
( 46) The use of '' beni espropriati ~ in the Italian text of the Treaty should not be read as a restriction on this
protection. The Respondent itself recognized that the principle of expropriation was deve!oped in Artide V
precisely for the purpose of protecting the investment of capitai in a broad sense.
<• The advisability and importance of this dause is qui te evident because of the peculiar economie and fìnancial
structure of our country, in which the accumulation of savings does not correspond to the productive needs
or to any program of fulJ employment. The influx of foreign capitai represents an indispensable supplement
for our country».
Memoria/, Chamber of Deputies, Parliamentary Proceedings Documents - Bills and Reports, N. 246-A,
p. 4, presented to the Office of the President, 2 Mar. 1949, p. 2 (Annex 3). See Counter-Memorial, Annex 4,
pp. 12-13.
(47) For an extensive discussion of the concept of « taking » and « expropriation » in international la w, see
Memoria!, pp. 44-47.
CHAPTER V
FAILURE TO PROVIDE PROTECTION AND SECURITY
A final area of protection under the Treaty denied to Raytheon and Machlett concerned
the protection and security of their property. Artide V(I) of the Treaty provides that United
States corporations shall receive in Italy the most constant protection and security for their
property, and shall enjoy in this respect the full protection and security required by international
law (48). Artide V(3) provides that United States corporations shall receive in Italy no less protection
and security than that accorded to Italian corporations and other foreign corporations.
The delay in ruling on the challenge to the requisition order until immediately after the
ELSI plant, equipment, and work-in-process had been acquired by EL TEL was a denial of
the level of procedura! justice accorded by international law (49). Normally the legality of the
requisition would have been reviewed within 30 days after the date the ruling was sought,
which in the case of ELSI was on 19 April 1968 (50).
A timely decision by the Prefect could have avoided the need to place ELSI in bankruptcy
because while the voluntary petition in bankruptcy was filed on 26 April 1968, ELSI was not
in fact dedared bankrupt until 16 May 1968. Thus, if the requisition had been rescinded, the
bankruptcy could have been avoided by ELSI asking the bankruptcy judge to deny the petition.
The occupation of the plant, which resulted in its deterioration and impeded the Trustee's
efforts to dispose of it, occurred with the tacit approvai of the local government authorities (61).
It no doubt discouraged potential buyers from inspecting the plant and assets and generally
chilled the process of selling ELSI for its full value. Therefore this action also constituted a
denial of << constant protection and security », thereby violating Artides V( I) and (3) of the
Treaty regardless of whether physical damage actually occurred from the occupation.
The Respondent implies that Artide V only protects immovable property and any failure
in ruling within a reasonable time or in protecting the plant was not a failure to protect immovable
property of Raytheon and Machlett. This construction of Artide V is unjustified. Artide
V(3) states:
« The ... corporations ... of either High Contracting Party shall within the territories of the
other High Contracting Party receive protection and security with respect to the matters
enumerateci in paragraphs I and 2 of this Artide ».
Artides V( I) and (2) speak of protection and security for « persons » and « property », not
« immovable property ». Property in it ordinary sense is not confined to immovable property (62),
(48) Artide V(I) of the Treaty states in pertinent part:
« The nationals of each High Contracting Party shall receive, within the territories of the other High Contracting
Party, the most constant protection and security for their persons and property, and shall enjoy in this respect
the full protection and security required by international law ~ (Emphasis added).
(49) Memoria!, pp. SZ-53·
(50) Memoria!, p. ZI.
(61) Memoria!, pp. 53-55· The Respondent is incorrect saying that the occupation of the plant by the
workers occurred prior to the requisition. Although some brief, intermittent rikes known in Italy as « hiccup » strikes
occurred at the plant prior to I Aprii I 968, there was no long-term, indefinite contro l of the plant by the workers.
Memoria!, Annex ZI paras. I6-I7. Further, the Respondent did not do anything to keep the workers out of the
plant nor to << preserve » the value of the plant.
(62) For instance, under rules of customary international law, takings of property concern expropriation of
ali rights in the investment, not just in the right to possession of immovable plant and equipment. See, e.g.,
Revere Copper and Brass, Inc. v. Overseas Private Investment Corporation, 56 International Law Reports, pp. zs8,
Z90-Z93·
REPLICA DEL GOVERNO U.S.A. 153
and when the Treaty intends to cover immovable property, such as in Artide VII, it expressly
says so.
In this case, the property of Raytheon and Machlett in Italy was ELSI itself. The entire
entity of ELSI - plant, equipment, receivables, inventories, goodwill, and other intangibles -
was at stake when the requisition occurred. The Respondent was obligated to protect ELSI
from the deleterious effects of the unlawful requisition. The failure to overturn the Mayor's
order, and the failure to provide ELSI with any security from trespass, deprived Raytheon and
Machlett of the security and protection for their investment to which they, as roo percent owners
of ELSI, were entitled.

PART VI
COMPENSATION
CHAPTER I
THE DUTY TO PAY AND MEASURE OF COMPENSATION
As set forth in the United States Memoria!, the United States is entitled to compensation
in the full amount of the losses resulting from the wrongful conduct of the Government of
Italy (53). Compensation should be measured in this case by the injuries suffered by Raytheon
and Machlett (54).
Ali of the injuries suffered by Raytheon and Machlett should be included in the measure
of compensation. A State may discharge its duty to make reparation by implementing measures
designed to re-establish the situation prior to the wrongful act, i.e., restitutio in integrum (55).
Where it is not possible to restore the situation that would have existed if the wrongful act
had not been committed, or restoration does not fully redress the injury caused by the State's
unlawful act, damages should be awarded in lieu of restitution to compensate for ali losses or
injury caused by a State's wrongful acts (56).
(53) For a complete discussion of Respondent's obligation to make full compensation, see Memorial, pp. 56-
57·
(54) The Respondent correctly notes that the losses suffered by nationals are not necessarily identica! to those
suffered by the State. Counter-Memorial, p. II5, n. 3· However, international tribunals and commentators
have recognized that damage to the national as a result of a violation of a treaty or customary international law
may serve as a measure of the compensation to the injured State, particularly where, as in this case, the treaty
provision was designed to ptotect the parties' respective nationals and the violation of the treaty provision caused
direct financial loss to the national. See Memorial, pp. 57-59.
(••) Memorial, p. 58.
( 06) Memoria!, pp. 58-59.
CHAPTER II
THE NATURE OF THE INJURY
SECTION I. - Raytheon and Machlett Suffered Financial Losses with Respect to Loan Guarantee
Payments, Return of Investment and Open Accounts.
The requisition directly prevented the orderly liquidation of ELSI. Had the Respondent
not interfered with the liquidation, Raytheon and Machlett would have recovered the market
value of ELSI as a going concern in 1968. The book value of ELSI - the closest available
approximation of going concern value in this case (57)-was Lire 17,053·5 million as of 31 March
1968. This amount would have allowed payment of ali of ELSI's creditors in full (including
Raytheon) (58), payment of ali administrative costs, and would have even returned Lire 391 million
to Raytheon and Machlett as a small return of the large investments they had previously
made in ELSI. This amount would have been insufficient to recoup Raytheon's and Machlett's
investment in ELSI, since they stili would have lost over US$1 I million in investments made
since 1956.
By contrast, the Trustee in bankruptcy recovered only Lire 6,373.8 million from the sale
of ELSI's assets to EL TEL. Raytheon and Machlett, therefore, lost the full value of their
open accounts with ELSI (59) and, more importantly, were required to pay ali of the guaranteed
loans (60), thus incurring some Lire 6,931.4 million in losses. The difference between Raytheon's
and Machlett's position had they been permitted to proceed with the orderly liquidation (recovery
of Lire 391 million) and the losses they sustained as the result of the Respondent's interference
(net loss of Lire 6,931.4 million) is Lire 7,322.4 million (US$II,7J9,200) (61
).
SECTION 2. - Raytheon Incurred Substantial Legal Expenses.
In addition, as a further direct consequence of the Respondent's actions in violation of the
Treaty, Raytheon incurred more than US$939,800 in outside legai and related expenses in
connection with the bankruptcy proceedings, in defending against suits brought by Italian
(57) See infra, Part VI, Chapter III.
(58) The United States has declined to claim compensation based both on sale of ELSI's assets for book
value and settlement with the large unsecured, unguaranteed creditors. The damages claimed in this case are
based on the premise that had Raytheon and Machlett recovered book value or greater, all ereditar claims could
have been satisfìed in full.
(59) That Raytheon and Machlett declined to file a claim for their open accounts with ELSI in the bankruptcy
process is irrelevant to the question whether they are entitled to recover the losses associated with the
open accounts as a result of the Respondent's violations of the Treaty. However, it should be noted that the
principal reason Raytheon did not seek recovery for the open accounts in the bankruptcy process was the inescapable
fact that due to the requisition and Respondent's subsequent interference in the bankruptcy process, Raytheon
and Machlett would not have recovered sufficient compensation in the bankruptcy process to justify the
cost of fìling a claim for their open accounts.
(60) The Court should reject the Respondent's assertion that the Respondent is not responsible for payments
of the guaranteed loans. First, as demonstrated supra Part V, Chapter III, guaranteed loans are a type of
investment specifìcally protected by the Treaty. Equally important, Raytheon's out-of-pocket expenses associated
with payment of the guaranteed loans would not have been incurred but for the Respondent's requisition
of ELSI's plant and assets, and are therefore a direct loss compensable under internationallaw. See Memoria!,
pp. 6o-61.
(61) For a complete discussion of Raytheon's and Machlett's actual fìnanciallosses as compared to the planned
orderly liquidation, see Memoria!, pp. 6o-61.
REPLICA DEL GOVERNO U.S.A. 157
bank creditors in Italian courts, and in pursuing its claim against the Respondent for its actions
against ELSI (62). The Respondent's allegation that the legai expenses incurred by Raytheon
were not proximately caused by the infringement of the Treaty must be rejected. As a factual
matter, had the Respondent permitted Raytheon and Machlett to proceed with the orderly
liquidation pian, Raytheon would not have incurred these costs since the banks would have
been paid in full or in settlement. Furthermore, reimbursement for legai costs arising from
an unlawful act is widely recognized by international tribunals (63).
SECTION 3· - Compensation Received by the Trustee for the Unlawful Requisition was Inadequate.
The only « compensation" paid for the requisition was limited to Lire I 14 million, considered
to be the rental value of ELSI during the requisition period. The Court of Appeals of Palermo
rejected the claim by the Trustee for the diminution of the value of ELSI's assets and for ELSI's
inability to dispose of its plant and assets during the same period (64). The amount of the judgment
was paid to the Trustee who, after deducting costs and expenses, distributed the proceeds to
ELSI's creditors (66). This amount has been taken into account in the calculation of compensation
requested in this case.
(62) For a complete discussion of the legai and related expenses incurred by Raytheon, see Memoria!, pp.
61-62. The Counter-Memorial asserts that Raytheon was awarded costs by Italian legai courts, which include
~ fees corresponding to lawyers tariffs t. Counter-Memorial, p. II7. Raytheon did receive nominai court costs,
but this amount was not sufficient to cover all legai expenses.
(63) Memoria!, p. 62. See M. WHITEMAN, Vol. III, Damages in International Law, pp. 1998, 2005, 2o2o-
2021 (1943), discussing the cases of Thomas W. Mather (United States v. Mexico) (award included amount for
legai expenses incurred by claimants to procure the return of gold seized by Mexican troops) and the Louisa (United
States v. Mexico) (award included amount for legai expenses incurred in prosecution of claim relating to seizure
of cargo); L. Sohn and R. Baxter, « Convention on the International Responsibility of States for Injuries to Aliens t
c~ revised Harvard Draft Convention •), reprinted in F. v. GARCIA-AMADOR, L. SOHN and R. BAXTER, Recent
Codification of the Law of State Responsibility for Injuries to Aliens, p. 133 (1974) (Artide 36 states that a << claimant
shall be reimbursed for those expenses incurred by him in the local and international prosecution of his claim
which are reasonable in amount and the ncurrence of which was inecessary to obtain reparation on the international
piane»).
(64) Memoria!, Annex 8x.
(66) Memoria!, Annex 26, Attachment.
Il
CHAPTER III
ENTITLEMENT TO THE VALUE OF ELSI AS A GOING CONCERN
The starting point for the calculation of compensation is the value that would have been
realized by Raytheon and Machlett by the sale of ELSI as a going concern in the orderly liquidation.
Going concern value typically includes the fair market value of the company's assets
and the future profits of the company's continued operations. In ELSI's case, however, the
actions of the Respondent made it impossible for ELSI to become self-sufficient. Thus, while
those familiar with ELSI's operations and its potential for sale determined that the intangible
value of ELSI's product lines in an orderly liquidation would command a value (66), it was not
then - and is not now - possible to piace an exact vahie on these assets or on the future earnings
potential of each line.
The closest remaining approximation of ELSI's going concern value is the book value of
the assets as of 31 March 1968: Lire 17,053 million. Book value, being merely an accounting
tool, does not measure going concern value as such, because it merely value assets at acquisition
cost less depreciation. This is so also with respect to any asset, such as land and buildings,
which may have appreciated in value. I t does not measure the actual market value of the assets
or the full intangible value of the company, and therefore understates ELSI's real economie
worth (67).
The Respondent does not argue that the United States is not entitled to the value of ELSI
as a going concern. Instead, the Respondent argues that book value does not reflect the market
value of the assets (68). First, the balance sheet drawn up as of 31 March 1968 was current within
the framework of ELSI's system of financial accounting, was supported by reliable records,
and therefore is the valuation that most closely approximates the value of ELSI's assets at that
time (69). Second, while book value does not take into account the deterioration in value of
ELSI's assets as a result of the delay caused by the bankruptcy, Raytheon and Machlett are
entitled to the value of ELSI at the time of the Respondent's wrongful interference with the
orderly liquidation, not at the expiration of, or at any point during the bankruptcy process.
It was the Respondent - not Raytheon or Machlett - who caused and interfered with the
bankruptcy process and thereby caused the delay in the purchase of ELSI's assets. The
Respondent, therefore, is responsible for any decrease in the value of ELSI's assets due to
this delay.
The Counter-Memoria! also implies that the Court should reject the compensation sought
on the basis that it is supported by « documents originating from ELSI or Raytheon or affidavits
closely connected with Raytheon (1°) ». Again, this assertion should be rejected. lnternational
arbitrations have long accorded probative value to affidavits of interested parties, particularly
those that are based on personal knowledge and are corroborateci by contemporaneous business
records, such as those presented in support of this case (71).
(66) Memoria!, Annex 13, para. 1s.
( 67) Of course, if the Respondent had made available the investrrlent incentives it had promised or had otherwise
become involved with ELSI prior to the requisition, ELSI's book value would have been substantially higher.
(68) See Counter-Memorial, p. ns.
(69) See supra, Part II, Chapter I, Section 3·
(70) Counter-Memorial, p. ns.
(71) D. SANDIFER, Evidence before International Tribunals (197S), pp. 3S1~Ss; see e.g., Gill Case, s Reports
of International Arbitrai Awards, pp. 157-159 (1931) (affidavit corroboràted by letters from British Minister and
REPLICA DEL GOVERNO U,S.A. 159
The Respondent does not offer an alternative method of valuation. Instead, the Respondent
merely questions whether some other measure properly reflects the value of ELSI. As the
following discussion demonstrates, neither the quick-sale value, the valuation performed by
the judicial valuator, nor the valuation submitted by EL TEL properly establish the market
value of ELSI in the spring of 1968.
Consistent with its recognized limited use, ELSI's management created a worst case scenario
for the sale of ELSI's assets for purposes of internai corporate planning by ELSI's shareholders.
In so doing, they established what is referred to as a << quick-sale » value. This value was calculated
by discounting the book value of ELSI's assets in order to identify a worst-case minimum
realizable value of ELSI's plant and tangible assets in an orderly Iiquiciation. The quick-sale
value was an internai determìnation of the minimum guaranteed return on the sale constructed
for plantling purposes. It does not reflect the full value of ELSI's tangible assets or their market
value, nor does it take into account· the significant intangible value of ELSI's business (12
). In
addition, it did not include construction in process, studies in process, deferred costs, and
other smaller book-value items (13).
The Counter-Memorial erroneously places substantial probative weight on ·the United
States use of the quick-sale value in the 1974 diplomatic claim. Obviously, the use of a quicksale
value in the originai claim is not dispositive of the proper measure of ELSI's going concern
value. • The value was usedas a matter of convenience in the diplomatic claim and in the spiri t
of compromise on which a settlemènt of the dispute might be based. As this claim has now
been brought to the Court for resolution, the United States has a right to the full measure of
compensation for injuries imposed by the Respòndent;
The valuations performed by the • bankruptcy valuator and the valuation submitted by
EL TEL should both be rejected as they do not assess the · going concern value of ELSI a t the
time of the requisition. The bankruptcy valuator attempted to . value ELSI's assets as of 11
Octoper 1968, more than five months after the tìme of the Respondent's wrongdoing. Moreover,
the valuation which was presented to the bankruptcy judge by EL TEL two days after the third
auction, and more than a year after the illegal requisition, clearly under-valued ELSI's plant,
machinery, and equipment (14). This valuation also failed to include ali of ELSI's assets, such
as those in Milan and Rome, and the X-ray, semiconductor, complex components and other
product lines. Of course this valuation was prepared by EL TEL's parent company, Siemens
S.p.A., itself à member of the IRI group, and therefore cannot be considered an objective assessment
of ELSI's true value.
employer); Stacpoole Case, 5 Reports of International Arbitrai Awards, pp. 95-96 (affidavit corroborated by disinterested
party seven years after loss); Tracy Case, 5 Reports o/ International Arbitrai Awards, pp. 90, 92 (1930
(claimant's affidavit corroborated by affidavit from someone in position to know the facts of loss).
(72) The intangibles include ELSI's reputation as a producer of reliable electronic products, experience and
know-how in the electronics industry, its supplier and customer lists and market reputation, patent licenses and
other rights to technology supplied by Raytheon and Machlett, the technical assistance agreements that would
have been executed by Raytheon and the new purchasers, and the value of existing contracts.
(73) The'difference between the Lire 193 million quick-sale price and the Lire 217 million price established
by the court-appointed valuator for work-in-process is stark evidence of the artifìcially low value of the quick-sale
estimate for purposes of a worst-case scenario. · ·
(74) Counter-Memorial, Volume 5 (Unnumbered Documents, Volume III).
CHAPTER IV
THE AWARD OF INTEREST
Compensation awarded should include interest, compounded annually, from the date of
the requisition until the date of the award (13). The circumstances in this case not only cali for
an award of interest but also require that the rate and calculation of the total amount reflect
the commerciai realities of the case. Raytheon and Machlett invested in ELSI with the goal
of obtaining a return on their investment. These same commerciai considerations were paramount
in Raytheon's and Machlett's decision to engage in an orderly liquidation of ELSI's
assets. The Respondent's requisition of ELSI's assets and interference with the ensuing
bankruptcy frustrateci Raytheon's and Machlett's investment objective, deprived Raytheon
ànd Machlett of funds to satisfy ELSI's creditors, and caused Raytheon and Machlett to pay
ELSI's debts from its own funds. Thus, the Respondent is responsible for the loss of the use
of the revenue and funds over time.
The Respondent asks this Court not to award interest because the application to the Court
could ha ve been made « many years earlier (16) », However, the Respondent presents no legai
support for the proposition that delay in filing a claim is a bar to an award of interest. The
Respondent's argument is also based on a faulty factual premise- that any delay in the filing
of the claim is attributable to actions of the United States, Raytheon, or Machlett. The injured
parties did not delay in seeking redress for their grievances. The claims asserted in this case
were communicated to the Respondent immediately after the requisition and by a diplomatic
claim provided to the Respondent in 1972 and formally presented in 1974. Subsequent to the
presentation of that claim, the two governments have been in diplomatic communication in an
attempt to reach a negotiated settlement of the dispute. In short, the Respondent can claim
no prejudice as a result of the passage of time which would entitle it to a reduction in or absolution
from the obligation to pay interest on this claim or to attribute the delay to the claimants.
Indeed, Respondent has benefited from the value of Raytheon's and Machlett's lost investment
in ELSI since the time of the requisition and should now be held accountable for it.
The Respondent's reliance on the Corfu Channel Case as a basis for denial of an award
of interest is misplaced (17). The question of interest was not before the Court in that case, as
the United Kingdom did not assert a claim for interest. Thus, the Respondent has presented
no basis for a refusal to award interest in this case.
Interest awarded should be compounded annually (1B). The Respondent bases its opposition
to an award of compound interest on the ground that it was not awarded in the case involving
British Property in the Spanish Zone of Marocco (19). Although the arbitrator in that case did
award simple interest, he went on to recognize that there are situations where compound interest
is proper (B0). An award of compound interest is compelling in this case since Raytheon and
(70) For a complete discussion of the award of interest, see Memoria!, pp. 62-67.
(76) Counter-Memorial, p. II7.
(77) Counter-Memorial, p. II7.
(7B) Memoria!, pp. 66-67.
(79) 2 Reports of International Arbitrai Awards, p. 6so (1924), cited in the Counter-Memorial, p. u7.
(BO) Ibid. See also Case of Antoine Fabiani, summarized in M. WHITEMAN, op. cit., at pp. 1785-89; American
Independent Oil Co. v. The Government of the State of Kuwait, 21 International Legai Materials, p. 976 at p. 1042
( 1982).
REPLICA DEL GOVERNO U.S.A. 161
Machlett have lost the use of their funds for nearly twenty years. If Raytheon and Machlett
had not suffered the financial losses they did, these funds would either have generated additional
earnings or would have been used to repay debt. These funds therefore would have generated
either interest earnings or interest savings, which in turn would have been devoted to profitable
use. Each year that compensation is not awarded to Raytheon and Machlett, the injury to them
is in fact compounded. Thus, the actual loss to Raytheon and Machlett is most closely approximated
by calculating interest at a commerciai borrowing rate, compounded annually.
SUBMISSIONS
Accordingly, the United States submits to the Court that it is entitled to a· deè:laration and
judgment that:
(a) the daims brought by the United States are admissible before the Court since ali
reasonable local remedies ha ve been exhausted;
(b) Italy- by engaging in the acts and omissions described above and in the Memoria!,
which prevented Raytheon and Machlett, United States corporations, from liquidating the
assets of their wholly-owned Italian corporation ELSI and caused the latter's bankruptcy,
and by its subsequent actions and omissions - violated the internationallegal obligations which
it undertook by the Treaty of Friendship, Commerce and Navigation between the two countries,
and the Supplement thereto, and in particular, violated:
- Artide III(z), in that Italy's actions and omissions prevented Raytheon and Machlett
from exercising their right to manage and control an Italian corporation;
- Artide (V)( I) and (3), in that Italy's actions and omissions constituted a failure to provide
the full protection an d security as required by the Treaty an d by international la w;
- Artide V(z), in that Italy's actions and omissions constituted a taking of Raytheon's
and Machlett's interests in property without just compensation and due process of law;
- Artide VII, in that these actions and omissions denied Raytheon and Machlett the right
to dispose of their interests in immovable property on terms no less favorable than an Italian
corporation would enjoy on a reciproca! basis;
- Artide I of the Supplement, in that the treatment a:fforded Raytheon and Machlett was
both arbitrary and discriminatory, prevented their e:ffective control and management of ELSI,
an d also impaired their other legally acquired rights and interests;
(c) that, owing to these violations of the Treaty and Supplement, singly and in combination,
the United States is entitled to compensation in an amount equal to the full amount of
the damage su:ffered by Raytheon and Machlett as a consequence, induding their losses on
investment, guaranteed loans, and open accounts, the legai expenses incurred by Raytheon in
connection with the bankruptcy, in defending against related litigation and in pursuing its
daim, and interest on such amounts computed at the United States prime rate from the date
of loss to the date of payment of the award, compounded on an annual basis; and
(d) that Italy accordingly should pay to the United States the amount of US$I2,679,000,
plus interest, computed as described above and in the Memoria!.
z8 March zg88.
ABRAHAM D. SOFAER
Agent of the United States
of America
ARNOLD I. BURNS
Deputy Attorney General
Department of J ustice
ANmx I
STATEMENT BY PROFESSOR FRANCO BONELLI
UNIVERSITY OF GENOA
Dated z March xg88
My name is Franco Bonelli. I am an attorney and counselor a t la w duly admitted to practice
in ali courts in Italy. I graduated magna cum laude from the University of Genoa in 1960.
I am the senior partner in Studio Legale Bonelli where I specialize in commerciai law, partièlilarly
bankruptcy law. ·In my practice I have counselled numerous major private and public
companies in bankruptcy law and bankruptcy proceedings. I have held the chair of Commerciai
Law at the University of Genoa since 1976 and was a visiting professor at Stanford University
in the United States. I am the author of severallegal publications on commerciallaw. I am
the founder and editor of « Giurisprudenza Commerciale )) and '' Diritto del Commercio Internazionale
)), I have been involved both as arbitrator and as advocate in various domestic arbitrations
of commerciai disputes and in international arbitrations under the rules of the Chamber
of Commerce in Paris.
I have been asked to provide my opinion on whether Elettronica-Sicula, S.p.A. (« ELSI »)
was entitled in 1968 to proceed with an orderly liquidation under Italian law, whether ELSI
was obligatèd to file a petition in bankruptcy prior to the requisition on I Aprii 1968, and whether
any delays in ELSI's bookkeeping in early 1968 due to earthquakes in Sicily or strikes at the
plant violated Italian law.
The following opinion is based on my experience in ltalian bankruptcy law and my review
of the Memoria! of thè United States Government, the Counter-Memorial of the Government
òf ltaly, and thè accompanying ·annexes to each.
Entitlement to an Orderly Liquidation.
I. A company is entitled under Artide 2448, N. s, of the ltalian Civil Code to engage
in an orderly liquidation of its assets upon a resolution of its shareholders to that affect.
Raytheon and Machlett acted in accordance with this law when they voted on 28 Mar<:h 1968
to liquidate the plant and assets of ELSI.
2. In Italy it is widely recognized that an orderly liquidation generates a more favorable
return to the shareholders than does placing the company into bankruptcy.
There are two principal reasons for this. ·First, a trustee in bankruptcy lacks the knowledge
of the industry and marketing expertise to locate a buyer and execute the terms of the sale at
the greatest return to the shareholders. Second, the trustee does not have the same monetary
incentive to maximize the sales price as would the shareholders in an orderly liquidation.
3· In my experience it is common practice for larger bank creditors in Italy to settle claims
for 40 or so percent of value, rather than taking the risk of receiving little or nothing in the
bankruptcy process.
No Obligation to File a Petition in Bankruptcy.
4· Based on my review of ELSI's financial data attached to Annex 13 of the United States
Memoria!, it is my opinion that ELSI was under no obligation to file a petition in bankruptcy
164 RASSEGNA DELL'AVVOCATURA DELLO STATO
under Italian law. Under Italian law, ELSI would have been obligated to file a petition in
bankruptcy only if its liabilities dearly exceeded its assets or if it was impossible for ELSI to
fulfili regularly its financial obligations. At no time during its operations, as summarized in
Attachment EI to Annex I3 of the United States Memoria!, did ELSI's liabilities exceed the
book value of its assets. Moreover, as evidenced by the United States Memoria!, ELSI consistently
met and was in a position to meet ali of its financial obligations.
I have no reason to believe the book value was incorrect since it appears from the United
States Memoria! that ELSI's balance sheets were audited by the company's auditors and by the
accounting firm of Coopers and Lybrand. Therefore, if the book value had been higher than
the actual value, the book value would have been diminished by virtue of Artides 2423 and
2425 of the Italian Civil Code.
No ]eopardy of Compulsory Dissolution.
5· It is also my opinion that ELSI was never in jeopardy of compulsory dissolution.
Under Artide 2447 of the Italian Civil Code, ELSI would have been considered dissolved as
a matter of law if its capitai were depleted below a statutory minimum amount. At the relevant
time the statutory minimum was Lire I,ooo,ooo. Attachment BI to Annex I3 of the United
States Memorial demonstrates that ELSI's capitai, even after taking into account losses, was
always weli above the statutory minimum.
Compliance with Article 2446.
6. I t is my opinion that ELSI was ali times in compliance with Artide 2446 of the Italian
Civil Code. When a company's losses exceed one-third of its capitai, Artide 2446 grants the
shareholders of a company a one-year grace period from the date they knew or should have
known of such los.ses either to reduce its capitai or to take another appropriate action. As Annex
I3, Attachment BI demonstrates, at the fiscal year ending September 30, I966, ELSI's capitai
was Lire 4,ooo million and its losses were Lire 2,oo7,I million. As the same Annex demonstrates,
in I967 the company devalued the capitai stock to Lire I,500 million to reduce the company's
losses and invested an additional Lire 2,500 million to bring the company's capitai back to Lire
4,ooo Iniliion. During the fiscal year ending September 30, I967, however, ELSI's losses once
again exceeded one-third of its capitai. This time, the company did not adjust its capitai and
instead the shareholders voted to proceed with the orderly liquidation of ELSI's assets. This
decision was taken within the one-year grace period authorized by Artide 2446 and was in ali
respects in conformity with Italian law.
Delays in ELSI's Bookkeeping.
7· Any delays in ELSI's bookkeeping in early I968 that were due to earthquakes in Sicily
or strikes at the plant were merely brief and unavoidable interruptions in ELSI's recordkeeping.
In my opinion such delays do not violate Artides 2I6 or 2I7 of the Italian Bankruptcy Act.
Genoa, March 2, zg88,
FRANCO BoNELLI
Studio Legale Bonelli - Genoa
TITLE II
ON BANKRUPTCY
Chapter I
ON DECLARING BANKRUPTCY
5· State of insolvency. - The entrepreneur who finds himself in a state of insolvency is
declared bankrupt.
The state of insolvency is manifested by defaults or other external facts which would
demonstrate that the debtor is no longer in a position to satisfy his own obligations in a regular
manner.
TITOLO II
DEL FALLIMENTO
Capo I
DELLA DICHIARAZIONE DI FALLIMENTO
5· Stato d'insolvenza. - L'imprenditore che si trova in stato d'insolvenza è dichiarato
fallito.
Lo stato d'insolvenza si manifesta con inadempimenti od altri fatti esteriori, i quali dimostrino
che il debitore non è più in grado di soddisfare regolarmente le proprie obbligazioni.
ANNEX 2
STATEMENT BY PROFESSOR ELIO FAZZALARI
UNIVERSITY OF ROME
Dated 29 February I988
My name is Elio FazzalarL I am an attorney at law practicing in Italy and am qualified to
appl;lar. before the Supreme Court of Cassazione. I ha ve .been·appointed by the International
Chamber of Commei:èe of Paris ·as chairman of severa! international arbitrations.
I graduateci in 1944 from the Law Faculty of Rome University. I have been a professor of
Civil Procedure since 1957. Since 1972, I have tought Civil Procedure at the Law Faculty of
Rome University.
I am a member of the Intèrnational Association for Comparative Law and a professor at
the International Faculty of Comparative Law in Strasbourg.
I am the Director of the Procedura! Law Section of " Enciclopedia del Diritto "·
I am the author of several legai publications and treaties of civil procedure.
I was requested to provide my opinion as to whether Raytheon and Machlett exhausted ali
local remedies in Italy with respect to their claim before the International Court of Justice involving
their subsidiary Elettronica-Sicula, S.p.A.
The following opinion is based on my knowledge of Italian civil law and my review of the
Memoria! of the United States and of the Government of Italy.
I
In its defense the State of Italy claims that, as a consequence of the execution order of the
two treaties between Italy and the United States of America (t;reaties of July 12, 1949 and September
I, 1960, respectively), the Italian internai law has been integrated with the provisions
of the said treaties and therefore Raytheon and Machlett should have and could have requested
enforcement of these provisions in an I talian court. On the other han d, the respondent does
not specify which subjective position it assumes may have arised in the Italian internai law nor
which judicial remedies it assumes may belong to Raytheon and Machlett.
Thus, Artide V of the Treaty, providing an indemnification for an individuai dispossessed
of his own property, is not self-executing. In fact, in domestic law - to the structure of which
it is necessary to make reference, and in our case to Italian law - an indemnification can be
recognized either as "diritto soggettivo>> (enforceable in an ordinary court) or as "interesse
legittimo >> (which is a different situation, enforceable in an administrative court): the provision
of an indemnification obligation does not imply a determination of which of the two subjective
positions an individuai has been awarded, and such specific determination must be derived from
other provisions of Italian law.
Also the provision of Artide I of the Supplementary Agreement is not a complete norm; in
any case, a claim for damages in an Italian court is subject to the same specification as mentioned
above with regard to Artide III of the Treaty: the Italian legislator must further specify what
kind of indemnification and/or compensation is provided and which court is competent to deal
therewith.
REPLICA DEL GOVERNO U.S.A. 167
Similarly, as Italy has not introduced in Italian law provisions affording United States citizens
the additional protections of Articles III and VII, United States citizens in Italian courts
may only assert the protection of Italian law as applied to ali companies in Italy.
Any claim for the additional protections created by Articles III and VII - as weli as those
arising from Article 1 of Supplementary Agreement and Artide V of the Treaty - must
therefore be raised by the United States at the international level.
II
Having excluded that the Treaty has introduced into the internai law claims and judicial
remedies stronger and different from those already available in the Italian legai system, we can
only repeat that Raytheon and Machlett; have exhausted ali available remedies for the simple rea,.
son that there were no remedies available to them. · ·
In fact, in .case. of an arbitrary requisition of the assets of a company, the shareholders do
not have any claim against the requisition order, because such claim is reserved to the company
(in the case in issue ELSI exercised the claim).
Similarly, an action for compensation by the authorities, as a consequence of a judicial
declaration of the illegitimacy of the requisition, is reserved to the company which was the object
of the requisition and not to its shareholders. And, in any case, if the company has become
bankrupt, any judicial action is reserved to the receiver, while the shareholders become creditors
of the bankruptcy (in the case in issue, the receiver of ELSI exercised ali claims without
success).
Rome, February zg, zg88.
ANNEX 3
LETTER FROM PROFESSOR ANTONIO LA PERGOLA PROFESSOR
AT THE UNIVERSITY OF BOLOGNA TO RAYTHEON COMPANY,
Dated 9 December I97 I
[legai opinion from Prof. ANTONIO LA PERGOLA, Atty.]
... For the reasons set forth above, then, I believe that I must conclude that in a situation
of this kind, ali the requirements appear to be satisfied for the US citizens who are members
of Raytheon-Elsi S.p.A. to be protected at the international leve!, without any internai remedies
being explored before. the filing of a possibile claim against the Italian Government.
La questione che mi viene proposta è quella di stabilire se - considerato tutto il complesso
delle vicende della S.p.A. Raytheon-Elsi, costituita a Palermo e per il caso che il governo degli
Stati Uniti intenda di avanzare reclamo contro il governo italiano per un illecito internazionale
nei confronti dei cittadini statunitensi, azionisti di detta società - si possa ritenere che sia stato
soddisfatto il requisito dell'esaurimento dei rimedi interni, e che il reclamo internazionale sia
proponibile.
Per rispondere al quesito, richiamerò, anzitutto, i principi di diritto internazionale che
consentono di accertare quando un individuo - in particolare, l'azionista di una società commerciale
- possa essere legittimamente tutelato dallo Stato di cui è cittadino, per torto subito
da parte di uno Stato straniero. Dopo di che, passerò ad indagare se nella situazione della specie
ricorrano gli estremi per l'ammissibilità del reclamo internazionale.
I. - È opinione comune degli studiosi e dei corpi giudicanti che ciascuno Stato sia legittimato
a proteggere i propri cittadini nei confronti dell'illecito che essi abbiano subito ad opera di
Stati stranieri. Tale tutela è però, subordinata al fatto che l'individuo abbia infruttuosamente
esaurito i rimedi che l'ordinamento interno dello Stato autore del preteso illecito consente effettivamente
di esperire. Il significato e l'ambito di applicazione della regola ora richiamatalocal
redress rule -verrebbe, però, frainteso, se si ritenesse che l'esaurimento dei rimedi interni
costituisca la sola condizione a dover essere soddisfatta perchè possa ammettersi la tutela internazionale
dell'individuo. Ogni qualvolta lo Stato agisce per tutelare un proprio cittadino non
basta, infatti, che questo abbia tentato inutilmente di ottenere il risarcimento del danno o comunque
la riparazione dell'illecito da parte dello Stato straniero: occorre anche che il reclamo
sia fondato su di un qualche titolo idoneo a far valere la responsabilità internazionale dello Stato
straniero. Non avrebbe, dunque, alcun senso chiedersi, nel caso che mi viene proposto, se i cittadini
americani, azionisti della Raytheon-Elsi, abbiano o meno esperito i rimedi locali, senza
accertare al tempo stesso che sussistano le altre condizioni volute dal diritto internazionale perché
un eventuale reclamo contro il governo italiano possa essere fondatamente avanzato. Diverso
sarebbe il caso in cui s'intendesse avanzare non un reclamo in senso proprio, bensl una generica
tutela diplomatica a favore di tali subbietti, dal momento che l'esercizio di questo più lato diritto
di protezione diplomatica - ultimamente richiamato e disciplinato nella Convenzione di Vienna
sulle relazioni diplomatiche del 18 aprile 1961, ma indubbiamente radicato nel diritto internazionale
generale - è svincolato - con la sola ed ovvia eccezione che nemmeno la generica tutela
diplomatica può estendersi ad altri soggetti, diversi da quelli connessi allo Stato dal legame della
REPLICA'DI!L GOVERNO 'IJ.S.A. 169
cittadinanza - dalla sussistenza dei requisiti necessari per la proposizione di un reclamo inter•
nazionale. Tali requisiti sono, essenzialmente, i seguenti:·
a) L'appartenenza dell'individuo ·allo Stato reclamante (c.d .. nationality of the claim).
Essa 'và intesa nel senso che l'individuo debba aver mantenuto lo status di cittadino dal momento
in cui egli subisce il d~no o la ·lesione derivante dal comportamento illecito di uno Stato stranìèrò,
ininterrottam~nte fino al ~omeìito in. C1li lo Stato cui esso appartiene abbia avanzato recilìiilo
.o àddirittura fino al momento in cui il reclamo sia stato deciso dai competenti organi
giudicanti. l)l:l ta,luni si ritiene altresl che parallelàmente a tale requisito sia richiesto un vincolo
(genuine link) effettivo, dunque, e non occasionate o involontario, tta il soggetto leso e lo Stato
autore dell'illecito, quale potrebbe, per es., tisultare dalla conclusione di ùn contratto d dal fàtto
di risiedere in detto Stato.
b) Altro requisito è che allo Stato, contro il quale è proposto reclamo, sia imputata la
commissione di un illecito internazionale. L'illecito deve consistere nell'inosservanza di una regola
internazionale la quale vincoli lo Stato stesso a un determinato trattamento nei confronti
dei cittadini dello Stato reclamante. Nel compimento dell'illecito non rileva il fatto che la regola
violata sia consuetudinaria piuttosto che convenzionale. Si avrà, tutt'al più, maggiore difficoltà
nel provare la violazione di una regola consuetudinaria, anzichè di un trattato, fermo restando
che Pònere della prova deve gravarè sullo Stato reclamante. Questo perchè la prova di una eventuale
violazione delle regole pattizie è presumibilmente agevolata dall'esistenza di un testo scritto,
sul quale il giudice può fare affidamento per stabilire quando l'illecito si è verificato, laddove non
vi è concordia di opinioni sul contenuto delle norme consuetudinarie dalle quali lo Stato. è vincolato
ad assicurare diritti allo straniero, se si prescinde dall'obbligo di adeguare l'organizzazione
ed il funzionamento della· giurisdizione ad un minimo livello d'imparzialità e di garanzie procedurali.
Non importa qui considerare altri aspetti problematici della definizione dell'illecito internazionale.
Mi limito. a rilevare che dottrina e giurisprudenza concordano nel ritenere che l'illecito
commesso in origine contro un individuo deve essere considerato come un illecito contro
lo Stato al quale l'individuo appartiene (Mavrommatis Palestine Concessions, International
Court of Justice. Series A, N. 2). Questo è. un punto fermo di tutto il diritto dei reclami, che
non può essere messo in discussione, perché ancorato alla premessa, tuttora pacifica, secondo
la quale gli individui sono privi di soggettività internazionale. Discende da tale premessa che
l'infrazione di una regola internazionale, la quale vincoli lo Stato ad un certo contegno verso
lo straniero, significa violazione di un diritto dello Stato di cui Io straniero è cittadino ; e cioè
del diritto di pretendere che la regola fosse osservata o addirittura del diritto di protezione diplomatica,
riconosciuto ad ogni Stato nei confronti dei propri sudditi. È certo, dunque, che il reclamo
internazionale è proponibile, vuoi che l'illecito tragga origine da un torto inflitto al privato, vuoi
che esso consista, invece, nella violazione immediata di un diritto dello Stato reclamante, in nessun
modo collegata con un qualche contegno che l'autore dell'illecito abbia tenuto nei confronti
dei cittadini di tale Stato. Ciò non esclude, tuttavia, che, quando lo Stato agisce per tutelare un
proprio suddito, l'ammissibilità del reclamo sia subordinata a talune condizioni le quali, logicamente,
non possono ricevere applicazione nel caso Ì1l cui lo Stato reclamante lamenti di aver
direttamente subito l'illecito. Tali, appunto, sono le ·condizioni di ammissibilità del reclamo
che ho fin qui richiamato, e prima. di ogni. altra quella dell'esperimento dei rimedi interni. Si
spiega infatti che i rimedi in questione debbano essere esauriti dagli invidivui stranieri, sempre
che essi siano effettivi e che servano alla riparazione del danno e della lesione subiti, in quanto
si presume che il soggetto abbia dovuto o voluto. sottoporsi all'ordinamento dello Stato territoriale;
ma altrettanto non può presumersi del sovrano straniero ; par in parem non habet jurisdictionem.
A ciò si aggiunge che la proposizione di un reclamo per torto arrecato all'individuo non
può in alcun caso prescindere dalla dimostrazione del danno o dalla lesione subita dall'individuo
tutelato. Da qui deriva che questa figura di illecito si distingue dall'altra dell'illecito direttamente
commesso nei confronti dello Stato sovrano (direct injury), la quale ultima si concreta solo che
vi sia la minaccia o la turbativa della lesione degli interessi o dei diritti di uno Stato. Per stabilire
poi, in concreto, quale· siano il danno o la lesione scaturenti dall'illecito, si dovrà aver riguardo
170 RASSEGNA DELL'AVVOCATURA DELLO STATO
al contenuto di. quella certa regola internazionale, la cui violazione è allegata dallo Stato recla·
mante; il reclamo dovrà pure indicare in quale delle forme consentite dal diritto internazionale,
il danno e la lesione lamentati dall'individuo debbano essere ripa111ti.
Se si ritenesse di poter prescindere dal requisito del danno o della lesione del soggetto privato,
si dovrebbe, del resto, negare ogni fondamento a tutto il sistema delle regole che governano
la proposizione dei reclami internazionali: il requisito della nationality of the claim si fonda, infatti,
sul concetto secondo cui ogni lesione della sfera dell'individuo equivale a una lesione della
sfera dello Stato; la stessa regola dell'esaurimento dei rimedi interni, presuppone che l'individuo
abbia subito un danno che gli derivi dalla violazione di una posizione giuridica vantaggiosa della
quale egli dovrebbe godere in base all'ordinamento dello Stato territoriale e che possa essere
riparato, nei modi previsti da tale ordinamento, senza che si verifichi quel diniego o ritardo della
giustizia (delay or denial of justice) che, dal punto di vista del diritto internazionale, costituisce
una autonoma figura di illecito.
2. - Questo è il quadro essenziale dei principi entro il quale deve essere contenuta l'indagine
del caso di specie.
Occorre ora vedere come, nell'applicazione di tali principi, possa venire in rilievo la circostanza
che l'individuo, per conto del quale verrebbe proposto il reclamo, sia azionista di una
società italiana. Tale elemento della fattispecie può sollevare qualche perplessità quanto all'am..,
missibilità del reclamo. Gli studiosi ed i collegi arbitrali continuano, invero, a dibattere il problema
se la tutela degli azionisti della società commerciale debba, o meno, rimanere preclusa
dal fatto che si tratti di individui organizzati in entità giuridiche, le quali, nella maggior parte
degli ordinamenti statuali, hanno personalità e nazionalità propria, con il risultato che i soci
possano essere cittadini di più Stati e che alla società può essere attribuita la nazionalità di uno
Stato diverso dallo Stato o dagli Stati ai quali appartengono gli azionisti. Per ammettere la tutela
internazionale dell'azionista senza riserve occorrerebbe, dunque, lacerare il velo della personalità
della società. Questa soluzione è stata infatti patrocinata innanzi alla Corte permanente dell' Aja,
da un autorevole giurista italiano, lo Scialoia, il quale osservava, nel caso Canevaro, che il diritto
del governo italiano a proteggere i propri cittadini non è limitato nè escluso dal carattere straniero
delle società, perché « se i diritti della società come persona giuridica sono distinti da quelli
degli azionisti, in realtà essi si esercitano soltanto negli interessi dei soci ». Altri rilevano, però,
che la tutela internazionale del singolo socio può dar luogo a seri inconvenienti e cosi, prima
di tutto, ai conflitti che sorgerebbero le volte in cui intervenissero diversi Stati, ciascuno per
tutelare internazionalmente propri cittadini, azionisti di una medesima società. Lo Stato autore
dell'illecito si troverebbe, in tal caso, a rispondere nei confronti di altrettanti soggetti quanti'
sono gli Stati che propongono reclamo. Se, poi, gli azionisti della società straniera fossero, a loro
volta, non già individui, ma società, magari di diversa nazionalità, potrebbe addirittura accadere
che venissero a concorrere ed a cumularsi i reclami proposti, sempre contro il medesimo Stato,
rispettivamente per conto della società e dei singoli azionisti. Di fronte a simili prospettive, la
giurisprudenza arbitrale ha dovuto procedere con molta cautela, ispirandosi largamente a considerazioni
di equità, per trovare il giusto punto di conciliazione tra la esigenza di non comprimere
indebitamente il diritto di protezione diplomatica di ciascuno Stato, da un canto, e di non
dilatare, dall'altro, oltre ragionevoli limiti, la responsabilità internazionale degli Stati in cui operino
società commerciali costituite da individui di varia cittadinanza .
. Opportunamente, dunque, il giudice Bagge, arbitro in alcune importanti controversie connesse
alla tutela degli azionisti, scrive a questo riguardo che le regole dell'intervento sono di
natura semiguridica e semipolitica, auspicando che esse non vengano applicate con criteri tanto
rigorosi e inflessibili da pregiudicare, piuttosto che agevolare, i buoni rapporti tra gli Stati sovrani.
I precedenti giurisprudenziali che mi sembrano· rilevanti sono, peraltro, pochi e riguardano
prevalentemente reclami presentati dagli Stati Uniti e dalla Gran Bretagna. Questi due
Stati si sono infatti trovati a dover tutelare con una certa frequenza gli interessi patrimoniali
dei propri sudditi all'estero e degli azionisti in particolare: la tutela è stata esercitata in un primo
tempo, mediante l'interposizione di buoni uffici e senza pretesa d'intervento ufficiale, e dal Delagoya
Bay Case (1889) in poi (MooRE, Digest of International Law, 1906, vol. VI) con l'instaurazione
di formali reclami. Ritengo di poter enucleare dalla decisione di quest9 caso e dalla sueREPLICA
DEL GOVERNO U.S.A. 171
cessiva giurisprudenza alcuni essenzialissimi principi che, per quanto mi risulta, vengono oggi
comunemente accolti, e che in ogni caso mi paiono i più rispondenti a quelle esigenze juris aequi
dalle quali il diritto dei reclami internazionali non può, specialmente in questa delicata materia,
divergere.
a) La società, come ente distintoclaì singoli soci deve avere la nazionalità dello Stato contro
il quale si reclama. Ciò serve ad escludd:e che la società; In quanto tale, possa essere tutelata
dallo Stato che intervi~ne per proteggere gli azionisti, di guisa che questi ultimi, se privati dell'àssistèn_
za dello . Stato . di cui . sono cittadini, rimarrebbero spogli di qualsiasi possibile tutela
interna:;:ùmale (Delagoa Bcay Case, cit.; Tlahualilo Case, in HACKWORT, Digest of International
Law, · Vol. V, 1943).
b) La società deve essere estinta o vetsare in uno stato di liquidazione o .di fallimento e tale
sintazione deve essere, beninteso, imputabile ad un illecito. internazionale (BAASCH AND RoMER;
Kunhardt Case in Ralstin, Venezuelan Arbitrations of 1903 (1904); El Triunfo Case, in MooRE,
Digest of International Law (xgo6), Voi. VI; Romano-Americana Case, in HACKWORTH, Digest,
ci t.).
La ratio di questo requisito è duplice. Prima di tutto si vuole che la società sia incapace
di fa:r. V!llere la lesione dei propri diritti da parte dello Stato territoriale altrimenti che per mezzo
di \.ln liquidatore o curatore e che, dunque, i singoli azionisti si trovino nell'impossibilità di fare
affidamento sul normale funzionamento degli organi sociali, per la tutela di ogni eventuale lesione
dei loro, diritti che discenda,_ mediatamente, da un torto inflitto alla società. Anche-in questo
caso, dunquej tutela internazionale e protezione diplomatica sono le sole possibili vie per tutelare
i diritti del socio e per ottenere la riparazione del danno da esso subito. Inoltre, è da considerare
che, ove la società sia sciolta o estinta, o versi in uno stato equivalente allo scioglimento o all'estinzione,
il diritto degli azionisti cessa di atteggiarsi semplicemente come un diritto di partecipare
ai profitti della società e si converte in un diritto alla ripartizione dell'eventuale attivo costituito
da). patrimonio sociale nett_o.- Anche in sede di applicazione di questi principi da parte della giurisprudenza
internazionale, si è discusso in ordine a quali diritti possano ritenersi immediatamente
e direttamente spettanti all'azionista come tale: mentre si esclude che in questa categoria
di posizioni soggettive dell'azionista possano rientrare i diritti conferiti all'azionista da norme o
da prindpi regolanti l'organizzazione della società o diretti a rimediare al mismanagement, il
diritto ad ottenere una quota proporzionale alla propria partecipazione sociale in sede di liquidazione
costituisce - nella maggior parte degli ordinamenti giuridici nazionali - un diritto soggettivo
di carattere· patrimoniale (proprietary right) immediato o, direttamente spettante all'azionista
come singolo.
c) Sempre che si riesca a stabilire che, cessando di operare regolarmente la società, il socio
abbia subito un danno derivante dalla lesione dei diritti ad esso attribuiti, lo Stato di cui l'azionista
è cittadino potrà intentate reclamo contro lo Stato autore dell'illecito.
Se tutti gli estremi che ho indicato ricorrono nella specie, allora è da ritenere ammissibile
la tutela diretta dell'azionista senza tener conto dell'esistenza della società come autonomo soggetto
di diritto. Ne seguirà- ed è questa una conseguenza assai importante - che il reclamo
non è subordinato all'esaurimento dei rimedi interni, non avendo il socio, in quanto tale, a1cun
rimedio da esperire all'interno dello Stato territoriale, per ottenere la riparazione del proprio
danno. Ai fini dell'ammissibilità del reclamo internazionale, il caso in cui non esistano effettivi
rimedi equivale, infatti, a quello in cui i rimedi esistenti siano stati inutilmente esauriti.
Le considerazioni che precedono permettono di inquadrare con sufficiente precisione gli
aspetti rilevanti per la soluzione delle questioni che, nella specie, mi sono state sottoposte.
Tenendo infatti presente quanto prima ho avuto modo di osservare in ordine al primo
requisito per la proposizione del reclamo da parte dello Stato al quale appartengono gli azionisti
-la commissione di un illecito internazionale- si può fare riferimento alla norma dell'articolo
I dell'accordointegrativo del trattato di commercio e navigazione del 2 febbraio 1948, stipulato
a Washington il 26 settembre 1951, ed in particolare alla previsione della illiceità di ogni misura
arbitrari~ o discrimi?athra "che abbia come conseg,ue~za di impedire !:effettivo controllo e l'aro172
RASSEGNA DELL'AVVOCATURA DELLO STATO
ministrazione delle imprese stabilite o acquistate da cittadini o persone giudiriche di una delle
parti contraenti, ovvero di pregiudicare i loro diritti ed interessi relativamente ad imprese ed
investimenti (specificamente, anche partecipazioni azionarie). L'impegno internazionale delle
parti contraenti di non adottare misure discriminative od arbitrarie nei confronti dei cittadini
dell'altro Stato è diretto anche a consentire la possibilità di ottenere, a condizioni normali, capitali
ed altri beni straordinari occorrenti per lo sviluppo economico delle iniziative derivanti dagli
investimenti dei cittadini delle due parti, oltre che ad ottenere la concessione delle speciali agevolazioni
in materia fiscale, doganale e tariffaria (alle quali poi si riferisce l'art. 5 dello stesso
accordo, con specifico riguardo alle provvidenze stabilite dalla legislazione italiana, in vigore al
momento dell'entrata in vigore del Trattato o successiva) per gli investimenti ai fini dell'industrializzazione
del Mezzogiorno.
Individuata così la norma internazionale, alla stregua della quale deve essere valutato il
comportamento del governo italiano, per stabilire l'eventuale sussistenza di un illecito internazionale
- e personalmente non ritengo possibile, nè utile, far riferimento a questo fine ad
altre norme, consuetudinarie o pattizie - il problema che si pone è quello di accertare se la situazione
di fatto che mi viene rappresentata dalla Raytheon Company possa in concreto offrire
gli elementi necessari per ritenere che siano stati violati gli obblighi scaturenti da detta norma.
Nel quadro delle iniziative, direttamente o indirettamente riferibili al governo italiano,
dei provvedimenti formali e di tutte le altre circostanze che hanno determinato o concorso a
determinare lo stato di estremo disagio in cui sono venuti a trovarsi gli azionisti americani della
Raytheon-Elsi S.p.A., un fatto emerge decisamente e merita di essere preso in particolare
considerazione. In conseguenza di tutti gli avvenimenti, che risultano da vari atti sociali e che si
trovano anche esposti nella relazione presentata al giudice delegato dal curatore del fallimento
della Raytheon-Elsi S.p.A. in data 28 ottobre 1968, la Raytheon-Elsi S.p.A. - dopo che
gli azionisti avevano a varie riprese, sia mediante il conferimento di ingenti somme a capitale
di rischio, sia con finanziamenti diretti o da essi garantiti alla Società, dovuto far fronte alle
perdite create dalla difficoltà di ambientamento dello stabilimento - era stata costretta ad adottare
un programma di riorganizzazione delle sue strutture produttive, che aveva sortito favorevoli
effetti, consentendo la riduzione delle perdite di gestione.
Tale programma - destinato ad assicurare, con l'aumento della produttività dell'azienda
sociale, una maggiore competitività dei prodotti di questa - comportava sacrifici per una parte
delle maestranze impiegate; sacrifici che, certo, non incontravano il favore dei sindacati.
Altre difficoltà, derivanti dalla situazione di alcune linee di prodotti dell'azienda, inducevano
gli organi di gestione della Raytheon-Elsi S.p.A. a decidere la cessazione delle attività
industriali, e poi anche delle attività commerciali, e a proporre agli azionisti la liquidazione della
Società, al fine di procedere ad un ordinato ed oculato realizzo di tutte le attività di quest'ultima.
In conseguenza di questa determinazione degli organi di gestione sociale, che venne resa pubblica,
il Sindaco di Palermo, nella sua qualità di ufficiale del governo, e con la tacita approvazione del
governo centrale, con suo provvedimento del 1° aprile 1968, ordinava la requisizione dello stabilimento
e di tutte le relative attrezzature per la durata di mesi 6, successivamente prorogato.
Contro questo provvedimento, la Raytheon-Elsi S.p.A. reagiva prontamente con i mezzi
consentiti dall'ordinamento italiano. Ma intanto, essendo stata ad essa sottratta la disponibilità
di tutti i beni costituenti il suo patrimonio aziendale, veniva irrimediabilmente pregiudicata
quella ordinata liquidazione delle attività sociali, alla quale la Raytheon-Elsi S.p.A. intendeva
procedere; ed in conseguenza quest'ultima, per il sopravvenire di massicce scadenze di debiti,
che essa non poteva pagare per la mancanza di liquidità così determinatasi, era costretta a richiedere
la dichiarazione di fallimento. Il fallimento veniva dichiarato con sentenza 7-16 maggio
1968.
Che tale provvedimento di requisizione sia illegittimo è stato riconosciuto dal Prefetto di
Palermo nell'esercizio del suo potere di controllo sugli atti del Sindaco quale ufficiale di governo.
Il Prefetto ha dato atto che la situazione di dissesto, alla quale è seguita la dichiarazione di fallimento
della Società, è diretta conseguenza del fatto che il complesso è stato sottratto alla disponibilità
del privato per l'intervento dell'autorità governativa.
Comunque, ai fini che qui ci interessano, non pare necessario indagare se sussistano gli
estremi di una illegittimità del provvedimento del Sindaco sulla base dell'ordinamento interno
REPLICA DEL GOVERNO U.S.A. 173
italiano, perché· questa è. questione che interessa, ormai, l'ufficio fallimentare (essendo in Italia
esclusivamente demandato al curatore della società fallita il potere di promuovere o resistere a
tutte le azioni legali in base alle quali è possibile stabilire in· via definitiva la contrarietà di questò
provvedimento alle norme di diritto interno)•.
Posto che alla Società è ormai sottratta. ogni possibilità di. iniziativa per la tutela dei diritti
che specificamente le competono; dato lo stato di fallimento in cui essa versa, si tratta, invece,
di vedere se gli azionisti abbiano subito una qualche lesione dei loro diritti· come .. risultato ·di un
comportamento dello Stato. italiano, ove questo risulti .• contrario agli obblighi. internazionalmente
assunti dall'Italia secondo le specifiche previsioni del trattato di axnicizia. Non pare dubbio
che il provvedimento del Sindaco. di Palermo ha impedito, in primo ·luogo; l'instaurazione e lo
svolgimento. di quel procedimento di liquidazione delle attività patrimoniali della RaytheonElsi
S.p.A., a condusione del quale si sarebbe potuto stabilire se gli azionisti, dopo il pagamento
dei debiti>sociali, avrebbero potuto ottenere il rimborso, in tutto od in parte, dei loro èonferimenti
ed eventualmente l'attribuzione di.una.quota -proporzionale alloro conferimentodel
residuo attivo netto sociale.
A prescindere, quindi, dal diretto .nesso causale che esiste fra la requisizione e lo stato di
dissesto, culminato nel fallimento della Società (a danno dei creditori sociali, nel cui collettivo
ed obiettivo interesse la· curatela· è abilitata a prendere i più opportuni rimedi), il comportamento
dell'organo dello Stato italiano ha immediatamente e definitivamente impedito ògni possibilità
di provvedere alla liquidazi6ne dell'attivo sociale, non solo mediante l'alienazione, secondo i
criteri di diretta ed immediata convenie~a per la Società, dei beni che a questi sono stati sottratti;
• ma anche . mediante tutti gli opportuni. accordi ·che quest'ultima avrebbe potuto raggiungere
coni creditori sociali, per i quali in effetti erano in corso avanzate trattative, e che avrebbero
anche consentito una possibilità. di recupero, sia pure parziale, • delle .ingenti somme che gli azionisti.
avevano impegnato nell'affare.
Ora; r.aver reso impossibile. la liquidazione della Società e le attività che normalmente conducono
al realizzo dei beni sociali, ha inciso direttamente su un diritto, pro.prio e specifico, degli
azionisti. Ed il comportamento dello. Stato italiano che ha. determinato questa situazione pregiudizievole
per i diritti e.gli interessidegli azionisti americani e.per lasorte degli investimenti da
essi fatti sotto forma • di partecipazioni azionarie, è certamente contrariò non solo all'espressa
previsione della norma internazionale sopra richiamata, ma. anche alla ~atio di quest'ultima,
diretta ad assicurare l'impegno ad un effettivo ed efficace riconoscimento delle esigenze di tutela
di tali diritti e interessi. Il comportamento dello Stato assume carattere arbitrario e discriminatorio,
infatti, in relazione a tutti quei principi di diritto internazionale e soprattutto al principio
della buona fede, che ci offrono il costante criterio interpretativo dei trattati: è chiaro che le
espressioni arbitrario o discriminatorio, usate nel Trattato, possono anche non coincidere con
la nozione di illegittixnità - soprattutto se questa venga riferita al significato che comunemente
ad essa si attribuisce nella giurisprudenza degli ordinamenti statuali - nel senso che arbitrario
o anche discrixninatorio può essere un comportamento formalmente non illegittimo ma pur sempre
contrario alla regola internazionale. Al limite, infatti, potrebbe ben esservi un comportamento
o un atto dello Stato sottratto ad ogni forma di controllo o di sindacato, secondo i parametri del
diritto interno, perché correttamente si può definire arbitrario un provvedimento per il solo fatto
che supera i Iixniti di quella esse~ialissima ragionevolezza e buona fede (che rileva ai fini della
applicazione del Trattato), ancorché non si verifichi tecnicamente abuso o straripamento nell'esercizio
dei poteri latamente discrezionali dell'attività pubblica. Tanto più opportuna è questa precisazione
in quanto, nella specie, l'arbitrarietà del provvedimento del Sindaco di Palermo come
ufficiale di governo è solo la nota più decisa di quel quadro, al quale prima accennavo e in cui si
compongono vari altri fatti, direttamente o indirettamente imputabili allo Stato italiano. Questi
fatti, che già di per sè isolatamente presi, rimangono indubbiamente sintomatici dell'inclinazione
verso un trattamento, se non ostile, certamente non favorevole verso gli azionisti americani della
Raytheon-Elsi S.p.A., assumono nel loro complesso decisa rileva~a al fine di esprimere un
giudizio sulla contrarietà del comportamento italiano agli obblighi del Trattato.
Fra i fatti che mi vengono segnalati vi sono un pesante intervento del Presidente della Regione,
prima della dichiarazione di fallimento della Società, diretto apertamente ad ostacolare
il programma di liquidazione, divisato dalla Società; la grande pubblicità data dal governo ita-
12
174 RASSEGNA DELL'AVVOCATURA DELLO STATO
liano attraverso la radio e la televisione all'intento di una Società del gruppo IRI, sotto il controllo
dello Stato, di procedere al rilievo dell'impianto, con l'effetto di scoraggiare ogni eventuale
acquirente privato e rendere impossibile quell'acquisto che esso ha poi effettuato ad un prezzo
di gran lunga inferiore al prezzo di stima; il comportamento delle banche creditizie dell'IRI
nei confronti degli azionisti americani, con l'41tentare vessatorie azioni legali presso le corti italiane,
al fine di rendere onerosa la situazione di questi ultimi.
Da tutti questi elementi io credo che si possa trarre il fondato convincimento dell'arbitrarietà
del comportamento del governo italiano, con la conseguenza che sussiste l'illecito internazionale.
Come prima ho precisato, occorre però, al fine di legittimare la proposizione di un reclamo,
che concorrano altri requisiti; ma nel nostro caso non si può certo dubitare che essi sussistano.
Infatti, gli azionisti sono cittadini americani: è dunque soddisfatto il requisito della nationality
del reclamo. Essi hanno poi stabilito, in conseguenza del loro interesse e degli investimenti
in una società italiana, un genuine link con lo Stato territoriale.
La Società ha, peraltro, indubbiamente, la nazionalità italiana; appartenendo la Società
allo Stato autore dell'illecito, ricorre un altro degli estremi perché il singolo azionista possa essere
tutelato dallo Stato di cui è cittadino. La Società versa per di più in uno stato di fallimento che
è, inter alia, diretta conseguenza del provvedimento di requisizione. L'esistenza del fallimento
impedisce ogni iniziativa diretta degli organi sociali al fine di ottenere che la società sia reintegrata
nella situazione nella quale. essa si sarebbe trovata se non fosse intervenuto l'illecito. Il
che ..- sulla base dei principi convalidati dalla giurisprudenza internazionalistica - costituisce
un altro elemento che rende possibile la tutela immediata dei soci da parte dello Stato di cui essi
sono cittadini. Non si pone, quindi, il problema dell'esaurimento dei rimedi. interni, che infatti,
in questa situazione, non sarebbero direttamente esperibili dagli azionisti.
Questi ultimi hanno subito una lesione specifica del loro interesse perché il comportamento
illecito dello Stato ha reso impossibile la liquidazione. Tale comportamento è di per sè astrattamente
idoneo a causare un danno, anche se la quantificazione concreta di questo danno è argomento
che non forma oggetto del quesito che mi è stato posto.
Per ·le ragioni svolte sopra, ritengo, allora, di dover concludere che, nella situazione della
specie, appaiono soddisfatti tutti i requisiti perché i soci cittadini statunitensi della RaytheonElsi
S.p.A. vengano tutelati internazionalmente, senza che vi siano rimedi interni da esperire
prima della proposizione di un eventuale reclamo contro il governo italiano.
Prof. ANTONIO LA PERGOLA
LL.M. (Harvard)
.ANNEx 4
LETTER FROM AVV. GIUSEPPE BISCONTI
STUDIO LEGALE BISCONTI, ROME, TO RAYTHEON COMPANY
Dated 6 Novembre I97I
Gentlemen:
Y ou ha ve requested an opinion as to w ha t remedies are available un der I talian la w to the
shareholders of Raytheon Elsi S.p.A. (hereinafter referred to as « ELSI ))) in relation to the damages
suffered by said shareholders as a consequence of the requisition by the Mayor of Palermo
of ELSI's assets on Aprii 2, 1968 and of subsequent events.
I have acted as Italian counsel to Raytheon Company, a shareholder in ELSI, in relation to
various matters since 1962. I have also acted as Italian counsel to Raytheon Company in relation
to ELSI matters continuously since March 1968.
As such counsel, I am fully familiar with the events concerning ELSI that occurred since
the resolution of ELSI's Board of Directors of March z6, 1968 to cease production and undertake
an orderly liquidation of ELSI and specifically with the events represented by the
aforementioned requisition, the subsequent action by the Italian Government, the bankruptcy
of ELS I an d its developments to date an d the pending litigation instituted by the Italian
creditor banks against Raytheon Company. Under Italian law the following remedies are
available:
I. Remedies against the requisition. The Mayor of Palermo in making the requisiti o n
acted as an official of the National Government. Under Italian law, an appeal against the requisition
order can be taken to the Prefect. Such appeal was promptly taken by ELSI. As an effect
of the bankruptcy of ELSI which occurred subsequent to and as a consequence of the requisition of
ELSI's assets by the Mayor, the right to pursue the appeal vested solely in the curator of ELSI's
bankruptcy. The remedy as such was a remedy available to ELSI as a company and prior to the
bankruptcy there was under Italian law n<;> remedy available to the shareholders of ELSI. The
requisition was made by the Mayor acting as an official of the National Government and there
is no remedy under Italian law against the National Government other than the aforementioned
appeal.
2. Under Italian law as an effect of the bankruptcy ELSI and its management were deprived
of the right to take any action in ELSI's name and such right has vested in the curator. Under
Italiani aw the curator exercises any such rights in the interests of ELSI's creditors and not of the
shareholders. Subsequent to the bankruptcy of the company, there is no possibility under Italian
law for the company itself nor for the shareholders to exercise any rights or action which the
company might have had prior to the bankruptcy. Following the decision by the Prefect o.t
Palermo of August 22, 1969 which ruled that the requisition by the Mayor was illegal, the curatoJ
of ELSI brought suit against the Italian Government and the Mayor of Palermo to recover damages
on behalf of ELSI's creditors. No such action would be available under Italian law to
ELSI's shareholders.
3· As stated above, the shareholders of ELSI have no direct action against the Italian Government
under Italian law in relation to the damages suffered by them as a consequence of the
requisition and subsequent event. In my opinion, the shareholders would not have a cause of
action even un der Artici e 2043 of the I talian Civil Code, because: (a) the requisition was direct176
RASSEGNA DELL'AVVOCATURA DELLO STATO
ed against ELSI and not the shareholders even though the latter eventually suffered damages;
and (b) Italian law provides fora specific remedy against the requisition which is the aforementioned
appeal to the Prefect. I know of no judicial decision in which Artide 2043 of the Italian
Civil Code was applied in similar circumstances. I t is my opinion that the shareholders of ELSI
would have no remedy or no effective remedy un der Artide 2043 of the I talian Civil Code.
4· By way of condusion, there is no remedy under Italian law available to the shareholders
of ELSI in relation to the damage suffered by them as a consequence of the requisition by the
Mayor of Palermo and the subsequent events. In my opinion there can be no question as to whether
the shareholders have exhausted all (nonexistent) local remedies.
Respectfully submitted
Studio legale Bisconti
Avv. GIUSEPPE BISCONTI
ANNEx s
ELSI - ELETTRONICA SICULA S.p.A.
BY-LAWS (ARTICLES OF INCORPORATION)
APPROVED BY THE SHAREHOLDERS EXTRAORDINARY MEETING
ARTICLBS OF INCORPORATION
Consolidation Act approved by the Special Meeting of July 19, 1961, ratified by the Civil
Court of Palermo by decree of October 28, 1961, amended in accordance with the resolution of
the Special Meeting of October 31, 1961
ARTICLB 17
The Special Meeting at first convening passes valid resolutions with the presence and the
favorable vote of more than half of the capitai stock [of the Company].
At second convening, the Special Meeting passes resolutions with the favorable vote of as
many members as would represent more than a third of the capitai stock.
However, both at first and at second convening, the favorable vote of as many members
as would represent at least 90 percent of the capitai stock is necessary to pass resolutions that
concern changing the Company's purpose, changing the Company's legal nature [form], dissolving
the Company ahead of time, moving the Company's main office abroad, or the takeover or
consolidation of the Company by or with other companies.
ELSI - ELETTRONICA SICULA S.p.A.
Sede Sociale: Palermo Via Villagrazia, 79
Capitala Sociale L: 2.ooo.ooo.ooo
STATUTO SOCIALE
Testo Unico approvato dall'Assemblea straordinaria del 19 luglio 1961, omologato dal Tribunale
Civile di Palermo con decreto del 28 ottobre I 96 I, modificato secondo la delibera dell'Assemblea
Straordinaria del 31 ottobre 1961
Le deliberazioni possono essere prese per alzata di mano o, quando si tratta di nomine per
le cariche sociali, per acclamazione, a meno che un diverso sistema di votazione venga richiesto
da tanti azionisti che rappresentino non meno di un quarto delle azioni presenti in Assemblea.
ARTICOLO 16
L'Assemblea ordinaria in prima convocazione delibera validamente a maggioranza assoluta
di voti purché siano intervenuti tanti azionisti che rappresentino in proprio o per delega almeno
la metà del capitale sociale.
Nel computo si terrà conto delle azioni costituenti la cauzione degli Amministratori anche
quando i medesimi, giusto l'art. 2373 del Codice Civile, devono astenersi dal voto.
In seconda convocazione l'Assemblea ordinaria delibera sugli oggetti che avrebbero dovuto
essere trattati nella prima, qualunque sia la parte di capitale rappresentata dai soci intervenuti.
ARTICOLO 17
L'Assemblea straordinaria in prima convocazione delibera validamente con la presenza e
con il voto favorevole di più della metà del capitale sociale.
In seconda convocazione l'Assemblea straordinaria delibera con il voto favorevole di tanti
soci che rappresentino più del terzo del capitale sociale.
Tuttavia sia in prima che in seconda convocazione è necessario il voto favorevole di tanti
soci che rappresentino almeno il novanta per cento del capitale azionario per le deliberazioni concernenti
il cambiamento dell'oggetto sociale, la trasformazione della Società, lo scioglimento
anticipato di questa, il trasferimento della sede sociale all'estero, l'assorbimento o il consolidamento
della Società da o con altre Società.
ARTICOLO 18
La gestione della Società è controllata da un Collegio Sindacale composto da tre o cinque
Sindaci effettivi e due supplenti.
I Sindaci durano in carica tre anni.
L'Assemblea ne nomina il Presidente e ne fissa l'emolumento.
REPLICA DEL GOVERNO U.S.A. 179
ARTICOLO 19
L'esercizio sociale si chiude al 31 dicembre di ogni anno.
Il Consiglio provvede entro i termini sotto l'osservanza delle disposizioni di legge alla compilazione
dell'inventario e del bilancio corredandoli con una relazione sull'andamento della gestione
sociale e sottoponendoli all'approvazione dell'Assemblea dei Soci.
ARTICOLO 20
Sugli utili che risultano dal bilancio, approvato dall'Assemblea, deduzione fatta di tutte
le spese di amministrazione e di esercizio, si preleva il 5 % sino a costituire il fondo di riserva
legale.
L'utile residuato, dopo averne prelevato il 4 % a favore del Consiglio di Amministrazione,
si ripartisce alle azioni, salvo diversa deliberazione dell'Assemblea.

REJOINDER
SUBMITTED BY
ITALY
(CASE CONCERNING ELETTRONICA SICULA S.P.A.- ELSI)
18 JULY 1988

INTRODUCTION
r. The Admissibility oj the application and the Applicant's allegations on the merits: some introductory
remarks.
First of all, the Italian Government reiterates its objection to the admissibility of the application
for the reasons set forth in Part III of the Counter-Memorial (l) and further developed
in Part III of this Rejoinder.
With regard to the facts, it may be useful to summarize at the outset the contentions made
in the Applicant's Reply, which contains severa! discrepancies with respect to the Memoria!.
The unlawful behaviour attributed by the Applicant to the Italian Government allegedly
consists of four welldefined acts or omissions, namely: the requisition of the ELSI plant by decree
of the Mayor of Palermo acting in his capacity of government official; the Prefect's delay
in rendering a decision on the appeal; the failure of public autohorities to protect ELSI's property
from the factory workers' occupation; the interference in the bankruptcy proceedings in
order to discourage private purchasers and allow IRI to buy up the plant at a price well below
its fair market value (2).
All the above-mentioned behaviour is alleged to be the result of a diabolica! plot hatched
by the Italian public authorities at many different levels (centrai government, or at least severa!
ministries, regional and local officials, State-owned companies, bankruptcy institutions, etc.)
all clone to take over a << technological jewel "• i.e. ELSI, on the cheap.
This plot allegedly led to the bankruptcy of ELSI, which would otherwise have been wound
up in an « orderly liquidation "· It also meant that in the bankruptcy proceedings the realized
value of the company's assets was much smaller than their true value so that Raytheon and Machlett
suffered damage to the extent of the difference between the actual amount received and what
would have been obtained if ELSI had been sold as a « going concern "• or at least on the base
of its quick-sale value, in the frame of an orderly liquidation (8). To be added to this are the
legai costs incurred and the compound interest on both items.
(1) Counter-Memorial submitted by Italy (Case concerning Elettronica Sicula S.p.A.- ELSI), hereinafter
referred to as ~ The Counter-Memorial &,
( 2) The Memoria! submitted by the United States of America (Case concerning Elettronica Sicula S.p.A.
- ELSI), (hereinafter referred to as ~ Memoria! >>), also contained (p. 22 expecially at note 18) a further accusation
against the Italian authorities: publicly-owned banks claimed that Raytheon, as << dominant partner&, should pay
ELSI's unsecured debts.
This reference has been dropped in the Reply submitted by the United States of America on 18 March 1988,
(hereinafter referred to as << Reply >), (see p. 128) and it should be acknowledged that the Applicant no longer intends
to pursue a claim on such point and the arguments supporting it. United States Government counsel has apparently
realized that it would be absolutely untenable and contradictory to claim that the publicly-owned Italian
banks would go against their own interests and ruin someone who owed them money, thus losing ali their unsecured
loans. As chance would have it, the loss incurred by the banks would have been equivalent in economie
terms (about lire 4,ooo million) to the profit made by IRI according to the charges made by the Applicant (Memoria!,
Annex 13, schedule E).
( 3) The quantification of the alleged damage has increased with time .. While the Claim of the Raytheon company
and Machlett Laboratories, incorporated against the Government of Italy in connection with Raytheon-Elsi
S.p.A. (hereinafter referred to as the « 1974 Claim >), contained in Counter-Memorial, Unnumbered Documenta,
Vol. I, II, III, refers exclusively to the quick-sale value, and the Memoria! to the book value and, in the second
instance, to the quick-sale value, in the Reply the Applicant mentions a higher value, justifying the increase by the
profits a • going concern & would expect to make. These ever increasing contentions ring particularly strange with
reference to a company whose history is marked solely by losses growing from year to year.
184 RASSEGNA DELL'AVVOCATURA DELLO STATO
As set out above, according to the United States Government the facts represent a series
of violations of the 1948 Treaty of Friendship, Coxnmerce and Navigation between the United
States and Italy and of the 1951 Supplementary Agreement and thereby give the United States
Government title to reparation of the losses allegedly incurred.
2. The facts represented by the Respondent.
The Respondent has clone more than merely indicate the gaps and inconsistencies in the
version of the facts presented by the Applicant and its patently tendentious nature. The Italian
Govemment has also attempted to clarify the order in which the facts actually took piace.
For instance, with regard to the requisition decree, the Respondent illustrated its legai basis
under Italian law and pointed out that its aim was not to deprive ELSI of the ownership of its
plant but merely to regulate the use of the plant for a period of six months (4). As far as the
« orderly liquidation >> is concemed, an outline has been given of the content of the decision taken
by the ELSI board of directors on 16 March 1968 (i.e. two weeks before the actual requisition (8),
and confirmed by the shareholders' meeting of 28 March (6), i.e. immediate cessation of production,
of ali coxnmercial activities and of employment relations as from 29 March (1). Moreover,
the Counter-Memorial examined expectable results of an « orderly liquidation » taking into account
the precarious economie and technical conditions of ELSI (8). Precise figures have been
given to show how the chance of avoiding bankruptcy implied the need to get the banks to which
ELSI owed money to accept the recovery of only so % of their credits (9). Therefore, the fact
that ELSI filed a petition for bankruptcy on 26 Aprii 1968 was an inevitable consequence of
its state of insolvency and not of the requisition decree. This was attested by the Palermo Court
of Appeal in its decision of 23 November 1973 (1°).
With reference to the alleged manipulation of the bankruptcy procedure by the Respondent,
it has been pointed out that, in ltaly, this type of proceeding is carried out by a receiver
appointed by the Court, who acts in cooperation with the presiding bankruptcy judge and also
consults a comxnittee composed of the creditors. Ali this contributes to ensuring that the proceeding
is objective. Furthermore, the Counter-Memorial also anlaysed the way in which the
bankruptcy auctions were organized and the prices fixed for the sale ofthe plant and equipment(11).
The conclusion was reached that the price paid by the purchaser was quite reasonable (12
), even
when compared with the estimated quick-sale value stated in the 1974 Claim by the Raytheon
and Machlett companies.
As to the occupation of the factory by the striking work force, it has been pointed out that
it began in early March 1968, when the plant was under exclusive ELSI contro!, and not after
the requisition. Moreover, the occupation did not prevent the winding-up operations from being
carried out regularly (13).
As to the delay with which the Prefect of Palermo rendered the decision upholding the ELSI
appeal against the requisition decree (22 August 1969), documentary evidence has been produced
to show that the average length of such procedures is 12 months, which is not substantially less
than the time actually taken in that case (16 months). It has also been pointed out that each petitioner
has the right to make a special request that the decision conceming him be expedited.
In the ELSI case, this was clone only on 9 July 1969 (14
).
(4) Counter-Memorial, p. 83.
(5) Memorial, Annex 31.
(6) Memorial, Annex 32.
(7) Counter-Memorial, p. 81.
(B) Counter-Memorial, p; 77-78 and So et seq.
(9) Counter-Memorial, p. 82.
(10) Memorial, Annex 81; see also Counter-Memorial, p. 87.
(11) Counter-Memorial, pp. 88, 89-90.
(12) Counter-Memorial, p. 90.
(13) Counter-Memorial, p. 86.
(14) Counter-Memorial, p. 87.
CONTROREPLICA DEL GOVERNO ITALIANO 185
One further aspect has been stessed: starting from 30 September 1968 (i.e. from the day
on which the requisition decree expired), ELSI lost control of the factory, as a result not of the
requisition decree, but of bankruptcy. The delay in the Prefect's decision was therefore not detrimental
in any way. Lastly, with regard to the Applicant's assertion that no adequate compensation
was paid, it has been responded that, although the decree of the Mayor of Palermo
acknowledged ELSI's right to such compensation, the actual payment .of compensation was
postponed pending the appeal to the Prefect of Palermo, and then the upholding of the appeal
implied that the right to such coi:npensation was replaced by the right to compensation for damages
caused by the requisition. To this effect a sum of money was awarded by Court of Appeal
of Palermo in its decision of 23 November 1973, which was confirmed by the Court of Cassation
on 26 Aprii 1976 (16). The sum was actually paid to the receiver in the ELSI bankruptcy proceeding.
Therefore, in the final analysis, it has to be acknowledged that the Respondent fulfilled
its obligation to compensate the damage caused by the requisition of the ELSI plant.
3· The Applicant's failure to provide evidence to justify its claims.
The Applicant and the Respondent have thus given the Court two widely differing versions
of the facts relating to the present case. This means that the dispute between them concerna not
only the different interpretation of Treaty provisions but, to an even greater extent, the different
statement of the facts to which those legai provisions are.to be applied. However, the comparison
between the two versions in question cannot be based on the assumption that they have equal
weight, and that the Court is called upon simply to establish which of the two parties can prove
its arguments more fully and convincingly. This is not the case, because the Applicant, who
claims to have been unfairly treated and therefore requests a reparation from the Respondent,
must demonstrate that the facts on which its claims are based are true.
W e know that, in international cases, it is very often impossible to identify an Applicant
and a Respondent since the parties may have concluded a special arbitration agreement. Therefore,
it is generally held that the problem of the burden of proof to be shared by the parties
cannot be resolved in the same terms as in a case heard before a national court. Nevertheless,
it is to be pointed out that, in the present case, which has been brought before the International
Court of Justice by a unilateral application, there is an Applicant and there is a Respondent.
And as it is true that the Applicant has put forward certain claims, it is equally true that it must
prove them.
It is interesting to note in this respect that when the Court has had to deal with a question
involving the burden of proof, e.g. the Corfu Channel case - a case centered around an unlawful
act committed in the territory of the Respondent (Albania) - the Court ruled that the sole
fact that this State exerted control over its own territory did not mean that it was obliged to have
a knowledge of all unlawful acts committed in such territory (16). The judgment declared that
the fact of .controlling the territory per se << neither involves prima facie responsibility nor shifts
the burden of proof, (logically, in the sense of freeing the Applicant from this burden). It is likewise
significant that, in an order on the Minquiers and Ecrehos case, the Court, after considering
the position of the two parties (who were both claiming sovereignty over the same territory),
and taking into account two articles of the special agreement concluded by them, stated that
u each party has to prove its alleged title and the facts upon which it relies , (17).
Lastly, it should also be noted that in its judgment of 27 ]une 1986 in the case between Nicaragua
and the United States concerning Military and Paramilitary Activities in and against
Nicaragua (18) the Court considered, among other points, Artide 53 of its Statute with respect
to the situation in which one of the parties does not appear and the other party requests its claims
(U) The English text of these decisions can be found in Memoria!, Annexes 81 and 82.
(16) ICj Reports 1948, p. 18.
(17) ICj Reports 1953, p. 52.
(18) ICj Reports 1986, p. 14 et seq.
186 RASSEGNA DELL'AVVOCATURA DELLO STATO
to be satisfìed (19). On that occasion the Court stated that '' the Court must attain the same degree
of certainty as in any other case that the claim of the Party appearing is sound in law and, so far
as the nature of the case permits, that the facts on which it is based are supported by convincing
evidence » (20). Later in the same decision the Court stated that '' it is of course for the party
appearing to prove the allegations it makes >> (21).
In conclusion, therefore, even though both Parties are called upon to prove their respective
claims in an international proceeding, it seems unchallengeable that in a suit in which the Applicant
complains of being the victim of unlawful acts, of which it accuses the Respondent and for
which it requests reparation, while the Respondent denies any beeach of its obligations and merely
requests that the application should be rejected, it is up to the Applicant to provide evidence
to justify its daims.
4· In particular, the lack of evidence concerning the causallink between the alleged acts and the
alleged losses.
The nature of the present dispute leads to another important consequence concerning the
evidence that the Applicant is obliged to provide. As was said, a series of events involving ELSI
occurred in the years I968 and 1969 for which, according to the Applicant, the Italian Government
is responsible. However, although these facts have a chronological sequence, it stili has
to be proved - an d this proof is necessary - that there is a causai link between them: in other
words, it stili has to be proved that there is any cause-and-effect relationship between them.
In particular, it must be pointed out that the most important circumstances giving rise to
damage the Applicant has complairied of were a direct consequence of the bankruptcy: the nonavailability
of the ELSI factory and plant after the requisition period (i.e. after 30 September
I968), the compulsory liquidation of the company's assets and the sale of the plant to the EL TEL
company. It is a well-known fact that the bankruptcy proceeding was requested by ELSI.
Therefore, the Applicant could attribute the above-mentioned circumstances to the I talian Government
only by asserting that the fìling for bankruptcy was caused by the requisition. However,
this assumption must be supported by evidence, which has not been forthcoming. On
the other hand, the Respondent's evidence to the contrary is substantial.
With reference to the generai problem of the role of causation in the field of State responsibility,
it is interesting to recall the principles adopted in the Draft Convention on the International
Responsibility of States for Injuries to Aliens, established by the Harvard Law School in
I96I (22). Artide I, paragraph I, of the Draft stated the following principle: ''A State is internationally
responsibile for an act or omission which, under international law, is wrongful, is
attributable to that State, and causes injury to an alien ». In Artide 14, paragraph 3, the concept
of causation was defìned in the following terms: '' An injury is '' caused » ... by an act or omission
if the loss or detriment suffered by the injured alien is the direct consequence of that act or omission
». Paragraph 4 added: ''An injury is not '' caused »by an act or omission: (a) if there was
no reasonable relation between the facts which made the act or omission wrongful and the loss
or detriment suffered by the injured alien, or; (b) if, in the case of act or omission creating an
unreasonable risk of injury, the loss or detriment suffered by the injured alien occurred outside
the scope of the risk ».
The restriction of indemnifìable damages to those which are the direct consequence of the
wrongful act of a State coincides with the prevailing jurisprudence of international arbitration
tribunals. This point wili be further elaborateci upon when we come to deal with the daim for
damages presented by the Applicant. For the time being only two observations will be made:
the only direct consequence of the requisition decree of the ELSI plant issued by the Mayor of
(19) ICj Reports 1986, p. 24, para. x8.
(20) ICj Reports I 986, p. 24, para. 29.
(21) ICj Reports 1986, p. 25, para. 30.
(22) American ']ournal of International Law, Vol. 55, 1961, p. 548 et seq.
CONTROREPLICA DBL· GOVBRNO:. lTALIANOé 187
Palermo on 1 April.x.g68 was<its temporary'unavailability to the company to which it belonged.
For this reason,. the damages granted by the Court of Appeal of Palermo (decision later upheld
by the Court of Cassation) were limited to the oortsequences of this unavailability by· its owner
calculated as the equivalent of 5 % of the value of thè requisition assets; ·•· As · tò the · greater losses
for wlùch the Applicant. is clail:ning cOm.pehsation• · they actually · result from the barikruptcy for
whf<l~ EL$l itselffiletla petitiom They are only indirectly :related to the requisition. even if. one
aceeptecldle Applicant's arguriìents that the unavailability of the plant was the cause of the insohrency
(which. is cleady dispro.ved by the· fact. that ELSl had ceased • all commerciai actìvities
as a restilt of the decision of 1.6 March rg68 olit$ Board of Directors)• The truth is that there is
absolutely no relation between the reql;lisition decree and the .fact that the company was liquidated
fòr bankmptcy;. ·
5; ·· The IJ:uestion ojattributìon of the alleged atts to the ltalian ·State.
One further remark must be made concerning the way the Applicant has presented the
facts concerning this case. We bave already pointed out that, in the Draft Convention on the
Responsibility of States for Injuries. to Aliens, established by the Harvard Law School in 1961,
one of the prescribed conditions for a State to be considered responsible for a wrongful international
act is that the act or omission in question must be« attributable to that State>>. A similar
provision is contained in Artide 3 of the Draft Articles on the Responsibility of States, the first
part of which was provisionally adopted by the lntemational Law Commission in 1980 (23).
This text also contains detailed provisions regarding what may be termed « acts of State » under
internationallaw. While the first category of this kind of acts logically consists of the behaviour
of any State organ deemed to be such under the law of the country (Article 5), it is denied that
the behaviour of a person or persons not acting on behalf of the State can be considered an « act
of State » (Artide II).
The reason for mentioning these two drafts is that the behaviour for which the Applicant
considers the ltalian Govemment to be responsible may indeed be partly attributed to the Respondent,
but must partly be attributed to others. In fact, it is not denied that both the requi
sition decree issued by the Mayor of Palermo in his capacity of government official and the decision
taken by the Prefect of Palermo on the appeal by ELSI can be attributed to the Italian State.
The same cannot be said, however, of the alleged interference in the bankruptcy proceeding,
insofar as it occurred through the action of the receiver (who, in fact, represents the creditors
and acts in their interest) under the contro! of the bankruptcy judge. And above all it is denied
that one can attribute to the Italian State any decisions taken by an IRI company (EL TEL)
or by IRI itself outside the exceptional case of a specific Government directive, as it was clearly
shown that the IRI group is legally and effe·ctively independent from the Government. With
regard to the latter point, Article 7, paragraph 2, of the Draft Articles provisionally adopted by
the International Law Commission considers as an « act of State >• the behaviour of the organ of
any agency which is not « part of the structure of the State or of a public territorial community »,
but is « empowered by the intetnal laws of the State to exercise powers of public authority insofar
as the organ has acted in such a capacity in the case in point •>. It is easy to show in the
present case that the organs of IRI or of companies associated with the IRI group have no powers
to act as a public authority under Italian law and therefore have not acted in such a capacity.
The indifference of the Applicant about the existence of a causai relation between the alleged
losses and the actions defined as wrongful, and about the limits within which such an action
rnay be attributed to the Italian State is displayed in numerous assertions contained in the Reply.
By way of example one may quote the passages contained on page 125, where it is stated that the
requisition « prevented Raytheon and Machlett from selling ELSI's assets and thus proceeding
( 23) The English text of the Draft Articles is in the Yearbook of the lnternational Law Commission, 1980, Il,
z, p. 30 et seq.
188 RASSEGNA DELL'AVVOCATURA DELLO STATO
with the orderly liquidation as planned », It is added immediately afterwards that, despite the
steps taken immediately by the two companies to have the requisition removed, « the Respondent
refused to quash the order and indeed told Raytheon that it would continue indefinitely >> (24
).
It must be objected that: (a) it was not the requisition, having only six months' validity, that
prevented the sale of the ELSI plant and the orderly liquidation of the company after 30 September
1968; (b) any impediment was due to the bankruptcy requested by ELSI, and it has yet to
be proved that the latter was to be a consequence of the requisition; (c) it is completely untrue
that the Prefect of Palermo refused to quash the requisition decree; indeed, its decision was to
quash it; (d) it was never intended that the requisition should continue indefinitely: this would
have implied a modification of the decree of the Mayor of Palermo fixing the term as 6 months
from I Aprii 1968, and such a modification was never made; (e) the declarations allegedly made
by the President of the Sicilian Region on 19-20 Aprii to the effect that the requisition would
continue after its norma! expiry were clearly made by a non-competent organ, as personal anticipation
unwarranted and not confirmed by facts. They cannot be attributed to the Italian
Government.
(~4) Reply, p. 125.
PART I
STATEMENT OF FACTS
I. Summary.
In addition to the remarks already made in the Counter-Memorial, the following observations,
concerning in particular:
(A) the requisition;
(B) the Prefect's decision;
(C) the occupation by the Work force;
(D) ELSI's situation and IRI's role, are now submitted to the Court.
2. (A) The Requisition. Italian practice concerning the requisition of plants.
The adoption by the Mayor of Palermo, acting as a government official, of a decree for
requisitioning the ELSI factòry, which was then overruled by the Prefect, is the only allegation
of fact made by the applicant Government. Ali the other allegatiòns made by the Applicant are
merely unproven assertiohs which may be rejected out of hand.
2.1. It was pointed out in the Counter-Memorial (l), and will be repeated here, that during
the period of time under consideration, the requisition of plants by mayors was a common occurrence
throughout Italy and was used mainly to protect the jobs and salaries of the employees of
companies threatened with closure, so that the companies' fìnancial difficulties would not have
a negative effect on employment. Moreover, the requisition of plants was ordered to eliminate
the negative effects on the local economy and on law and order deriving from a prolonged suspension
of production in the requisitiòned plant.
That this was a common practice among Itaiian mayors at the time during which also the
ELSI requisition was decreed, is shown not only by judiciai decisions concerning them, as mentioned
in the Counter-Memorial (l) and which will be again described in detaii in the following
pages, but aiso by the discussions by schoiars of the generai probiem of the mayors' power to
requisition industriai plants.
It is no coincidence that an essay by Professor Bigiiazzi Geri was published in 1969 which
concluded that mayors actually do have the power of requisitioning industriai piants under
Artide 42 (3) of the Constitution. In the essay, some preiiminary considerations concern the requisition
decree by the Mayor of Monsummano (issued on 6 February 1964) of a plant, the closing
down of which had led to the immediate dismissai of ali the workforce. As the author pointed
out, « this decree was, as is known, not unprecedented, since there are reported cases of similar
measures having been taken by mayors in similar situations » (4
).
(l) Counter-Memorial, p. 84.
(2) Counter-Memorial, p. 84.
( 3) Document N. 33·
( 4) Lina BIGLIAZZI GERI, Urgente necessità, requisizione d'azienda e potere del sindaco, in Democrazia e diritto,
1964, p. 93 et seq.
13
190 RASSEGNA DELL'AVVOCATURA DELLO STATO
The Mayor of Palermo of the time, Dr. Bevilacqua, stated in his affidavit (G) that the requisition
decree of the ELSI plant was in accordance with the policy followed by mayors of many
Italian towns at that time in similar circumstances. He also explicitly mentioned the requisition
decree by the Mayor of Florence issued shortly earlier with regard to the «Nuovo Pignone»
company.
It may be useful to describe the most significant cases in order to show that the Mayor of
Palermo conformed to the practice followed by mayors in other parts of Italy, both before and
after the period in question.
One typical instance is the Marzotto case (6), which gave rise to a complex judicial litigation
originating from the requisition of a plant decreed by the Mayor of Pisa on 25 June 1968
in response to the fact that, in view of the serious crisis in the textile sector, activity had been
ceased pending structuring.
The underlying reasons for the Mayor's decree are clearly expressed in the decree itself.
At the beginning it is stated that the management of the company had ordered production
to be suspended indefinitely in one of its factories employing some 8so workmen and derical
staff. The measure was considered to be « socially unacceptable », to have caused a situation of
severe hardship for the Marzotto employees and their families, and to bave consequently strongly
jeopardized the economy of the town. In view of the fact that the Marzotto plant at Pisa, which
had been operating in the wool sector for severa! decades, employing well-trained specialist
personnel, was one of the cornerstones of the economy of the town and the area surrounding it,
the decree also pointed out that the suspension of activity would cause irreparable damage to
the township, as the difficult generai economie situation facing the town would not allow the
dismissed Marzotto employees to find employment elsewhere. Furthermore, the various contacts
with the management had not led to any positive results and it was not possibile to forecast when
the plant might open again. Thus, there was a serious state of public necessity, and urgent and
exceptional measures had to be taken in order to avoid the definitive dosure of the plant and to
preserve the plant and equipment so that production could start again promptly.
A requisition in similar circumstances was decreed by the Mayor of Piteglio on 22 J uly
1968 concerning the Lima paper milis owned by «Stabilimento toscano carta e affini», This
was taken in order to avert a situation which had much in common with the Marzotto case.
It is of great interest to read the grounds on which the requisition decree was issued, especially
in view of the emphasis placed by the Mayor on the principle of the « social function ''
of ownership (Articles 41, paragraph 2, 42, paragraph 2, of the Constitution) (1). He described
as « antisocial » the behaviour of the company, which he expressly defined as « socially unacceptable
», The said principle was also indeed to explain the requirement of << urgent need ». In this
particular case, this need was identified as the serious hardship and irreparable damage the owners'
attitude would cause to the employees concerned and consequently to the whole township.
The terms « public interest » or« public necessity » (in Artide 7 of the Law N. 2248 of r86s: (B)
« serious and urgent public necessity », or in Artide 834 of the Civil Code (9), with reference to
expropriation, «in the public interest ») were given the broad meaning of «generai interest »,
Therefore, this was not intended as referring to the interest of the State or of public agencies,
but also to that of a wider category of subjects, such as the employees and their families and, by
extension, the entire township.
Equally typical is the case of S.p.A. Torrington of Genoa, an associate of the international
Torrington group, which manufactured needles for the textile industry.
( 5) Affidavit of Dr. Bevilacqua, Document N. 2. That this was not an exceptional measure and that many
other such urgent measures were taken by Italian mayors in similar circumstances is also confirmed by Dr. Ravalli,
the Prefect of Palermo at the time of the events in question, in his Affidavit, Document N. 8.
(6) For an accurate reconstruction of the dispute, see L. BJGLIAZZI GERI, L'« affare Marzotto », in Riv. giur.
lav., 1968, I, p. 415 et seq. For the text of the Supreme Court decision see Counter-Memorial, Document N. 23.
(7) Document N. 3 3.
(B) Memorial, Annex 34·
(9) Document N. 16.
CONTROREPLICA DEL GOVERNO ITALIANO 191
The Torrington group carne to Italy in October 1958 when it purchased the Aghi Zebra
San Giorgio plant, which employed some 150 persons. The number of employees subsequently
increased four-fold as a result of increased production, which was remunerative for a time.
However, also as the result of deteriorating working conditions (strikes and absenteeism),
the economie situation took a turn for the worse in I973-I975· Considerable losses were incurred
and the company was wound up.
The trade union organizations decided to occupy the plant. On 6 November 1975 the
Mayor of Genoa requisitioned the same plant.
The Mayor's decree explicitly stated that the prolonged suspension of production and the
dismissal of the employees had had a serious effect on the economy of Genoa. Social tensions
had been sparked off which would inevitably grow and even lead to specific problems of law
and order.
While the Mayor's power to requisition plants was acknowledged on principle by the Consiglio
di Stato, the requisition decree was set aside for reasons relating to the special circumstances
of the case (1°).
2.2. Another case which aroused much interest was that of the Società Italiana Industria
Zuccheri (SIIZ) (11).
By means of a decree of 16 July 1974, the Mayor of Chieti requisitioned the SIIZ sugar
mill of Chieti Scalo for a period of ninety days. The management of the plant was entrusted to
the Abruzzo Development Agency for the purpose of carrying out and administering the I974
sugar beet campaign. It was the company which had intention not to carry out the sugar beet
campaign in the Chieti plant in 1974.
By means of the requisition, the Mayor intended to ward off the economie and social damage
which would befall the employees if the company ceased its operations.
The use of the SITE company may also be mentioned (12).
On 16 September 1974 the employees of the Padua branch, as a result of threats of dismissal
to reduce staff, occupied the plant, thus preventing the construction activities from being carried
on. On 29 September 1974, the Mayor of Padua ordered the requisition of the SITE plant.
A further case concerned the Soc. Manifattura dell'Adda, whose plant was requisitioned
by decree of the Mayor of Berbenno in Valtellina on 20 February 1975, in order to ensure the
continuity of its production, which was considered essential for the economy of the area.
The Manifattura's difficulties, together with those of the Fossati plant in Sondrio, contributed
to the serious economie and social crisis affecting the whole valley. Consequently, also
in Berbenno it was necessary to evaluate the possible effects on law and order that such a state
of uncertainty might have. While the administrative court upheld company's appeal against
the requisition, it nevertheless noted that the Mayor's concerns over a possibile worsening of
the situation and its possible repercussions on law and order were justified (13).
A further example is the case of the San Marco company, the plant of which was requisitioned
in 1975 for the purpose of ensuring, in the interests of local employment, the company's
future activity and, thereby, to safeguard law and order (14).
During the same year, by a decree issued on 2 February 1975, the Mayor of Sondrio provided
for the immediate requisition of the plant of S.p.A. Cotonificio Felice Fossati, in order to
ensure the continuity of the company's activity, considered essential both for the area's economy
and for the public interest (15).
(10) Decision N. 72 of Consiglio di Stato, dated 7 February 1978, in Counter-Memorial, Annex 29.
(11) For further details, see Decision N. 198 of TAR of Abruzzo, dated 30 Dee· 1974, reproduced in
Document N. 7.
(12) See also Counter-Memorial, p. 84.
(13) For the text of the full translation of the decisions of the administrative court. see Documents N. 9 and x o.
(14) Already cited in Counter-Memorial, p. 85.
(15) See Decision N. 2II of T.A.R. of Lombardy, dated 30 Juli 1975, Document N. 9; Decision N. 21 of
the Council of State, V Section, dated 18 Jan. 1977, in Counter-Memorial, Document N. 28.
192 RASSEGNA DELL'AVVOCATURA DELLO STATO
For· the same reasons, on I4 September I974, the Mayor of Brindisi requisitioned the plant
of Società Industriale del Mezzogiorno (SIDELM) (16).
At the end of I973, the management of SIDELM, acknowledged that considerable losses
had been made in previous financial years. Furthermore, it expected the situation to worsen
owing to unfavourable market conditions. The management therefore decided to wind up the
company.
The plant was then occupied by the work force.
The prolonged negotiations and continuing occupation worsened the discontent of the
work force and heightened trade union and social tension. The resulting situ3.tion led the Mayor
to issue a requisiti o n decree o n the basis of Artide 7 of La w N. 2248 of 20 March I 86 5,
Appendix E. The requisition was of six months duration; the management of the plant was
entrusted to the Progresso e Lavoro Cooperative of Brindisi.
As reported by the administrative court in the decision on SIDELM's appeal (17) the decree
stressed that, in view of public demonstrations and the spreading of inaccurate and alarming information
in the press, « the situation had become untenable and unbearable >>. I t also alluded
to possible reactions by the trade union organizations and the employees, who had expressed
their intention « to occupy the railway station very soon ».
In the well-known Eridania Zuccherifici Nazionali S.p.A. case (18) the requisitions
were made because the company intended to close down the plants, and consequently dismiss
the work force. It was considered urgent to reassure the population concerning the future
activity of the plants, which were an indispensable hub of economie life for the whole area
and the intention was to protect law and order which had been jeopardized by the state of
unrest reflected in all the productive and commerciai sectors.
l t may therefore be concluded that mayors had frequently resorted to the use of their power
to requisition industriai plants for reasons of law and order or also in view of social unrest.
The concept of « economie and social law and order » thus emerged. lndeed, the requisition
of plants for reasons of « law and order » was used as a means of protecting public security
in the economie and social sense.
The cases reviewed above show how the requisition decree issued by the Mayor of Palermo
in I968 was a measure that many ltalian mayors have taken under similar circumstances.
3· lnstances of requisition of plants in the United States.
However, the criticism expressed by the United States Government over the fact that, even
in such a difficult period for the ltalian economy, the authorities of this country could, as an
extreme remedy for particularly serious crises, have recourse to the temporary requisitioning of
plants appears even more surprising in view of the fact that in the United States such a practice
is anything but unknown.
« The relatively new technique of temporary taking by eminent domain is a most useful
administrative device: many properties, such as laundries, or coal mines, or railroads, may be
subjected to public operation only for a short time to meet war or emergency needs, and can then
be returned to their owners ( ... ) »: this statement was made by the United States Supreme Court
when, in I 95 I, it was called upon to decide on another case of temporary taking of a plant by the
public authorities in the difficult years of postwar reconstruction (19).
The case in point is of particular interest for the present dispute as i t concerned a coal mine
where production was virtually blocked due to a strike and which, as a consequence thereof,
the Federai Government had decided to requisition and to operate under its own responsibility
(16) Counter-Memorial, p. 85.
(17) Counter-Memorial, Document N. 25.
(18) Counter-Memorial, p. 85.
(19) Pewee Goal Company Inc. v. United States, 71 Supreme Court, p. 670 at p. 673.
CONTROREPLICA DEL GOVERNO ITALIANO 193
for six months in order to avoid total paralysis of coal-mining activities in the country (2°). Far
from considering the requisition as such to be unlawful, the Supreme Court merely addressed
the question of the compensation to be paid to the owner of the mine as a result of the requisition
by the Government. In this context, the Court attempted to rationalize the subject of requisition
or «temporary takings" in the light of its abundant case-law. As the Court stated, «[t]emporary
takings can assume various forms .... There may be a taking in which the owners are ousted
from operation, their business suspended, and the property devoted to new uses ( ... ). A second
kind of taking is where, as here, the· Government, for public safety or the protection of the public
welfare, « takes " the property in the sense of assuming the responsibility of its direction and
employment for national purposes, leaving the actual operations in the hands of its owners as
government officials appointed to conduct its affairs with the assets and equipment of the controlled
company. Examples are the operation of railroads, motor carriers, or coal mines ( ... ) "· (21)
Without making at this stage a detailed examination of the criteria used by United States
courts when determining the compensation to which the owner is entitled in the case of the temporary
taking of his plant by public authorities, it may be noted that it shows that only in a few
cases the principle of « just compensation " has led to the granting of compensation equal to the
« fair market value " of the property taken. In cases in which, because of the economie crisis
and/or strikes in progress prior to the intervention of public authorities, the value of the requisitioned
plant was reduced, the United States courts had no hesitation in allowing only compensation
smaller than « fair market value "·
What is here important is to show that the practice of requisitioning plants in cases of proven
urgency andfor need to safeguard the generai interests of the economy and social peace is a remedy
that has been used also by the United States Government. Furthermore, while in Italy
it is clear that the power of requisitioning of the public authorities only exists if and to the extent
that it is expressely recognized by law, in the United States it is uncertain whether the authorization
of the legislator is in any case required or whether the taking of private property for
public use by an officier of the United States is admissible « as an act of Government >> even in
the absence of an explicit or tacit authorization by an Act of Congress (22).
4· (B) The Prefect's decision.
As already clarified in the Counter-Memorial (2 3), contrary to the Applicant's assumption,
ELSI waited a good 19 days before making its appeal to the Prefect and more than one year
before urging the Prefect to take its decision. The Prefect, as shown by the Affidavit of Dr.
Ravalli (24
), had formed the reasonable conclusion from ELSI's behaviour that the company
had no strong interest in the result of the appeal.
This is confirmed by the fact that the company filed a petition for bankruptcy barely one
week after lodging the appeal with the Prefect. Thus, a favorable decision of the appeal would
not have had as the consequence the free management of the assets.
What the Applicant states on its Reply (See p. rso), namely that « if the requisition had
been rescinded, the bankruptcy could have been avoided by ELSI "• is totally inaccurate. I t was
ELSI's long-standing insolvency that led to its bankruptcy. Only if the state of insolvency
had been uprighted - an unlikely event within those few days - bankruptcy could have
been avoided.
(20) The same mine has been subjected to a total of 4 separate temporary takings by the Federai Government,
ranging in duration from three months to one year, although the reason was always the same, namely that « of ending
strikes and restoring the production of coal in the national interest » (cf. Pewee Goal Company, I ne. v. United
States, 161 F. Supp. 952, at p. 955).
(21 ) 71 Supreme Court, 670, at p. 673.
(22) For the negative case see Youngtown Sheet Tube Co. et al. v. Sawer, Secretary of Commerce and nine other
cases, 103 F. Supp. 569, at p. 573; the case involved a requisition order issued by the Secretary of Commerce following
an Executive Order by the President of the United States himself regarding the main steel factories in the country,
w hich had been hit by a wave of strikes called for an indefinite duration.
(23) Counter-Memorial, p. 87.
(24) Document N. 8.
194 RASSEGNA DELL'AVVOCATURA DELLO STATO
The truth is that the Prefect's decision:
(a) was irrelevant to ELSI's state of insolvency, and indeed the company filed for bankruptcy
without waiting for the decision on the appeal and without urging it; it was in any event
irrelevant after the expiry of the sixth month, in view of the temporary nature of the requisition;
(b) was rendered within the period of time representing the average of this type of appeal
(25);
(c) was taken as soon as ELSI (or the receiver acting on its behalf) urged the decision,
after 14 months.
Therefore to argue, as the Applicant does in its Memoria!, (see pp. 21-22) and in its
Reply (see pp. 125-126 and p. 132), that the decision was rendered by the Prefect only after
EL TEL had acquired the company assets amounts to captiously exploiting a chance time
sequence to obtain a facile effect.
It must Iikewise be stressed that the complete reading of the Prefect's decision, instead of
a quotation of fragments out of context (as the Applicant does in the Reply see p. 38), leads
to the appreciation that the Prefect acknowledged that the Mayor was entitled to exert the powers
of requisition in accordance with the laws referred to, although he actually quashed the order
because in actual fact it was not possible to achieve the intended result, i.e. the reopening of
the plant.
5· (C) The occupation by the work force.
The Applicant's assertions over the occupation of the plant are incorrect. The work force
occupied the plant more than two weeks before the requisition, as is shown by a judicial decision
and press reports (26
) and not afterwards, as the Applicant would have it (27).
6. (D) ELSI's situation and IRI's role: the Applicant's contentions.
According to the United States Government, the Italian Government and IRI first boycotted
the attempt to proceed with the « orderly liquidation » of ELSI, and then interferred with the
bankruptcy proceeding so as to allow IRI to acquire the plant through one of its subsidiaries at
a price lower than its fair market value.
This argument is based on the following three assumptions, which form the heart of the
Applicant's presentation (28):
- ELSI was a going concern, in good, although not perfect, financial health at the time of
the events in question;
- the ELSI industriai complex was competitive and thus attractive to the market in that
i t was capable of the « manufacture of high quality and highly sophisticated electronics »;
- finally, IRI or one of its subsidiaries, is alleged to have « boycotted » the first three auction
sales in order to decrease the market value of the plant which was subsequently purchased by
ELTEL.
Ali three of the above contentions are totally gratuitous in that the United States Government
does not produce a shred of evidence in support of them. Furthermore, they are not true.
This objection, already expressed in the Counter-Memorial of the Italian Government (29),
(25) Counter-Memorial, p. 88.
( 26) Cf. the decision of the Court of Palermo, in Memoria!, Annex So, in particular at p. 8, and the artide
appeared in L'ORA, ro March 1968, Document N. 30.
(
27
) Memoria!, pp. 53-54· Reply, p. 133, note 39· The distinction between actual and occasionai sit-ins, which
was suggested by the Applicant, lacks of any supporting evidence. The truth is that, the occupation having taking
piace in March, there was no reaction on the part of ELSI, which obviously had lega! interest in the matter.
(28) Reply, pp. 127, et seq.
CONTROREPLICA DEL GOVERNO ITALIANO 195
was not cballenged in tbe Reply, as tbe passive repetition of the originai arguments wbicb bave
been proved unfounded cannot be taken as a cballenge. Consequently, tbe Italian Government
can justifìably claim tbat tbe basic premises of tbe application are not founded on evidence presented
in eitber tbe United States pleadings, but is merely conclusory, assertive, and argumentative.
7. ELSI' s economie and financial situation.
ELSI's crisis, wbicb was stabilized wben tbe events in question occurred, is evident from
tbe very statements made in tbe Memoria! and Reply of tbe Applicant Government, namely
tbat:
(a) ELSI's debts, according to tbe Memoria!, p. II, amounted to Lire I6.66 billion;
(b) its assets, wbicb bad a book value of Lire I7.05 billion, could not, as even Raytheon
admits (Memoria!, p. II), be assigned a quick-sale value of more tban Lire I0.84 billion;
(c) tbere was consequently a negative balance of about six billion lire, and since Raytbeon
itself admitted tbat ELSI was unable to meet its obligations, it must be assumed tbat tbe part
tbat could not be met amounted to at least six billion Lire.
Nor can it be argued tbat tbe above-mentioned negative balance was due solely to tbe
probable lower price obtained on tbe market in tbe course of a quick-sale. Indeed, ELSI's state
of insolvency would certainly bave been known to a conscientious management since it bad been
in existence sin ce late I 967. Three points are of interest in this regard :
(i) In I967 ELSI incurred a loss of more tban Lire 2,ooo million (after losing Lire 326
million in I962, I,228 million in I963, 284 million in I964 and 36I million in I965) (30) and was
obliged to proceed to reduce and tben increase its capitai. Despite this, in I967, ELSI again
lost more tban one tbird of its capitai, tbus revealing beyond any doubt tbat it was incapable of
producing event tbe minimum amount of income it needed to survive on tbe market. Tbe
disastrous trend tbat now begins to be outlined is certainly not compatible witb the image of a
« going concern » and solvent enterprise suggested by tbe applicant Government. Furtbermore,
this was formally recognized by Raytbeon management (31);
(ii) The ELSI fìnancial reports leave ampie space for doubt. Dr. Giuseppe Mercadante,
w bo analysed tbem on bebalf of tbe Bankruptcy Court, noted, among otber tbings: the need for
writing down stock for an amount « oscillating between Lire I ,soo,ooo,ooo and Lire 2,ooo,ooo,ooo
(3 2
) tbe inclusion of non-existent assets in tbe balance sbeet (for instance, an entry of
Lire 246,296,774 against a certain Neg Alfred Anateckmer of Quickborn (W est Germany), wben
the goods forwarded to this client bad already been returned by tbe latter and were stili beld in
customs (33
) ; and again direct << accommodation bills discounted witb tbe banks » for an amount
of Lire. I,2oo,ooo,ooo. (34) Consequently, ELSI's true losses for I967 alone, wbicb are obtained by
adding to the amo un t entered un der tbis beading in tbe official balance sheet (Lire 2,68 I ,3oo,ooo)
tbe decreases in value due to tbe above mentioned items, actually wiped out tbe company's sbare
capitai, even tbougb tbe latter bad only recently been increased; ali tbis in a company whicb,
in order to acbieve liquidity, bad been obliged to discount « accommodation bills », i.e. bills tbat
do no t relate to any commerciai transaction;
(29) Counter-Memorial, pp. 77, et seq.
(30) Counter-Memorial, p. 77·
( 31) See Project for the Financing and Reorganization of the Company « I967 Report *• prepared by
Raytheon-Elsi S.p.A., Memoria!, Annex 22.
(3 2) See the Technicai-Accountancy Advice on Raytheon-Elsi S.p.A., Counter-Memorial, Document N,
36, at pp. 2I-22 of the new translation presented by the Italian Government.
( 33) Ibidem, p. 23.
( 34) Ibidem, p. 3 x.
196 RASSEGNA DELL'AVVOCATURA DELLO <STATO
(iii) As indicated in the Affidavit of Mr Joseph A. Scopelliti (3~), already in early 1968
Raytheon had to transfer Lire 150 million to the First National City Bank of Milan to cover the
demands of an ELSI creditor who would not be fended off with vague promises of future payment.
ELSI was therefore unable to meet even the smallest of its commitments with its own
resources, thus revealing that its insolvency was not only economie but also financial.
The concept of " orderly liquidation » sounds quite odd against such a background. This
even more so, as also the concept of "going concern » mentioned by the United States Government
displays some very peculiar features. The production Iines were closed and, in early 1968,
the only activity of ELSI was to complete a number of unfinished products. Moreover, on 2
March 1968 the workers actually began an occupation of the plant and the management deemed
it prudent to remove ali the accounting files from the head office and take them to a small office
in Milan. Thus, the overall picture was as follows: the company had a chronic deficit; its production
Iines were shut down; its work force was occupying the plant; its management had practically
disappeared.
8. The responsibility jor ELSI's crisis.
The economie and financial disaster described above may be attributed direcly to erroneous
company management and misguided speculation by Raytheon. It is important to state it, because
the Applicant wrongly contends that" Raytheon and Machlett did nothing to create ELSI's
financial problems ».
Suffice it to recall a few financial figures :
(a) Dr. Mercadante, in bis 1968 Report to the bankruptcy Court, points out that, in the
ELSI financial reports of the previous three years, the royalties paid to Raytheon, the costs of
Raytheon technical assistance and Raytheon technical consultants' costs appeared to be blown
<up out of ali proportion both in absolute terms and compared with the cost of surveys and experiments
also paid for by the company. Dr. Mercadante's report states that it is not clear
" why the company spent so much on studies, research an d development (not counting amongst
others the high cost for technical consultants) while paying royalties to its holding company
which should have permitted a well-organized production adopting the production Iines Iaid
down by the same », while " there are indications that the company, after a number of years' production,
had not yet defined its production lines >> and « that the main losses resulted in the SCD
sector (electronic equipment), revealing it to be a complete failure and on which huge amounts
of money had been spent » (36);
(b) ELSI debts amounted to an average of Lire 12 billion, on which it had to pay a huge
amount of interest. In the previous three fiscal years (37), ELSI on average paid interest of Lire
8oo million per year (lire of the time), excluding the interest paid on medium-term loans. Taking
into account the much smaller amount of equity invested by Raytheon, this means that ELSI
was undercapitalized from the start and therefore doomed to go bankrupt unless it could obtain
a resounding commerciai and industriai success (38).
Dr. Mercadante pointed out that, if ELSI management had had « greater technical rectitude
» it would not bave allowed the " large costs » on surveys and research, etc. in view of the
<< fact that the overall aim of the company has not been achieved after so many years of activity
» (39), and that these expenses were "not justifiable » (40).
(3~) Memoria!, Annex N. 17, p. 8.
(36) See the Tecnichal-Accountancy Advice by Dr. Mercadante, (supra, nota 32), at p. 35·
(37) Ibidem p. 19.
( 38) Affidavit of Ing. Busacca, Counter-Memorial, p. 78 and Document N. 44·
(39) Mercadante Report, p. 3 x.
(40) Mercadante Report, p. 17.
CONTROREPLICA DEL GOVERNO ITALIANO 197
One may add that obsolete equipment had been acquired by ELSI (e.g. the semiconductor
production line, which proved to be the most ruinous) (41).
Some reasonably criticai analysis of the matter is quite sufficient to dose the argument of
ELSI's «high quality » and « highly sophisticated » electronics (which, anyway, found no market)
and to show that Raytheon and Machlett had more than some responsability in creating
financial problems for ELSI.
9· The obligation to file a petition for bankruptcy.
In its Reply, the Applicant Government stresses the fact that ELSI management was under
no obligation simply to file for bankruptcy. To this effect it cites the opinion of Professor Franco
Bonelli (42). Yet, the contention is groundless. In 1967, Raytheon's officiallosses amounted to
Lire 2,681.30 million. Accordirlg to Dr. Mercadante, afurther sum of Lire I,200-I,soo million
must be added for over-evaluation of stock and at least 3-400 million for non-existent credits.
The situation must have been worse {43) since it would otherwise be impossibile to explain the
large gap of six billion lire between book value of ELSI's assets and the value acknowledged by
Raytheon itself in the case of a quick-sale. This leads to the foliowing conclusions: (a) ELSI's
capitai (amounting to 4,ooo million) was complete~y lost; (b) the failure to cali a meeting to immediately
restore share capitai to the minimum level required by law or, alternatively, to wind
up the company, actually represents an offence committed by the management (see Articles 2447
and 2621 of the Civil Code (44); (c) the management was liable for prosecution for simple bankruptcy
(see Artide 2I7, N. 3 and 4 of the Bankruptcy Law (45) since, notwithstanding the
company's insolvency, no petition for bankruptcy was filed; and (d) the offence of misuse of
credit (Articles 2I8 of the Bankruptcy Law), insofar as the management, by concealing the
company's financial difficulties, continued to live off loans, including the ISO million received
from Raytheon in early 1968 to pay off a recalcitrant creditor. Thus, it is clearly established that
not having increased ELSI's capitai, and having come to know that the shareholders had no
intention of doing so, ELSI's management should have filed for bankruptcy (46).
Under these circumstances, the hypothetical « orderly liquidation », envisaged by the Applicant
Government, could certairily not take piace. In fact, things were quite different. After
acknowledging that it was unable to pay its debts, as is clear from the fact that it was intended
to satisfy unsecured creditors claims to the extent on only so%, ELSI was now trying to avoid
bankruptcy in the hope that the creditors would accept large cuts. At the same time, contrary
to the Applicant's contention, Raytheon never showed willingness to provide ELSI with sufficient
liquidity to proceed with an orderly liquidation.
After ali, an orderly liquidation, and not only in the Italian legai system, requires the IOO %
satisfaction of creditors, while Raytheon and ELSI suggested so o/o.
In fact, the Applicant appears to consider the hypothetical « orderly liquidation » as a remedy
which would be available also to an insolvent debtor, while under Italian law an insolvent
debtor is from the outset under an obligation to file for bankruptcy, and therefore cannot maintain
possession of its assets, manage them, and freely liquidate them.
Therefore, to speak of « orderly liquidation » as the natura! way of winding up ELSI, and
to criticize the failure to allow Raytheon to do so, is also the result of a distorted view of the applicable
law to the case in point.
In this connection it is not inappropriate to recall that in I January, I968 President Johnson
promulgated an executive order establishing a mandatory program restraining USdirect in-
(41) Affidavit of Ing. Busacca, Counter-Memorial, Document N. 44, and Affidavit of Ing. Ravalico
Document N. 14.
(42) Reply, Annex 1.
(43) See, for instance, on the state of the art, the remarks of Ing. Ravalico, Document No. 14.
(44) Document N. 16.
(46) Counter-Memorial, Document N. 21.
(46) For these considerations and for the obbligation of ELSI's management to file for bankruptcy, see the
Opinion of Professar Pier Giusto Jaeger, Document N. 32.
198 RASSEGNA DELL'AVVOCATURA DELLO STATO
vestment abroad (47). Although not mentioned in the US pleadings, this program had a broad
and important negative effect on the ability of US businesses such as Raytheon to lend or invest
additional funds and working capitai to their foreign subsidiaries, or to perform guarantees
of indebtedness of such subsidiaries. (48)
The effect of the Regulations was particularly harsh on parents of subsidiaries such as ELSI,
operating in Western Europe (49).
The effect of the Regulations was to force US parent corporations to o:ffset their « direct
investments » in their subsidiaries by making « long-term foreign borrowings » in the Eurodollar
market (50). However, in addition to the increased expense of any such borrowing, under the
Regulations, a repayment would eventually be « charged against » the permissible activity of the
US parent in future years; in 1968 there was no way of knowing when and how this unprecendented
and severe program would be dismantled (51
).
Most importantly, for a new guarantee of indebtedness of a foreign subsidiary to be authorized,
there were requirements for certification that the parent company « has no reason to believe,
under existing circumstances, that the affiliateci foreign national will be unable to pay or otherwise
satisfy such indebtedness without resort to performance under the guarantee >>(52
). No such
certification could have truthfully been made as to ELSI. Concerning payments of preexising
guarantees, the US parent would have had to « determine ... in good faith that (its foreign subsidiary)
... has not sufficient funds available to it to pay such indebtedness » (53).
The difficulties perceived by Raytheon in handling its overseas business in view of these
regulations were mentioned neither in the Memoria! nor in the Reply, although doubtless they
were a contributing (and governmental) cause of Raytheon's announced intent to terminate
ELSI's operations in 1968 (54).
xo. The claims brought by Italian banks against the sole shareholder of ELSI.
Perhaps the stubborness with which the Applicant Government claims that ELSI was entitled
to proceed with an orderly liquidation and that the bankruptcy petition became necessary
only as a result of the requisition decree and the consequent loss of free access to its plant, may
find its reason in the fact that, perhaps unconsciously, it tends to argue in terms of the bankruptcy
law of the United States. In fact, there are severa! basic differences between United States
law and Italian law which will be clarified here in order to avoid further use of concepts which,
in spite of their identica! nature, have completely different meanings when referred to one legai
system rather than to the other.
(47) See << Message to the Nation on the Balance of Payments • and Executive Order N. II387, reproduced as
Annexes (I) and (2) of Federa! Reserve Bank of New York Circular N. 6090 of January 4, I968. Document N. 25.
( 48) See Regulations of the Secretary of Commerce, dated January I, I968 (cfr. Title I5, Ch. X, Part Iooo),
reproduced as Annex (3) of Federai Reserve Bank Circular N. 6090, and in praticular Sec. I000.3I2 (a) and (e) of
the Regulations. Document N. 25.
(49) Ibidem, Regulations Sec. I000.3I9 (c).
(50) Ibidem, Regulations Sec. Iooo.504 (b).
(Vl) See for example speech delivered by the Vice President, Tax-Legal, of the National Foreign T rade Council
on October 9, I968, at pages 3-5. Document N. 26.
(52) See Generai Authorization N. I of January 22, I968, Sec. 2 (a) (I), contained in Federai Reserve Bank of
New York Circular N. 6102 of January 25, 1968. Document N. 27.
(53) Ibidem, Sec. 2 (a) (2).
( 54) In materia! filed with the United States Securities and Exchange Commission for the Fiscal Y ear ended
December 3I, 1968 (form 10-K Annua! Report Pursuant to Section 13 or 15 (d) of the Securities exchange Act
of 1934, enclosing the Prospects of Raytheon Company dated Aprii 15, 1968, (see Document N. 24), Raytheon said
in respect of ELS I an d its other foreign subsidiaries and affiliates that << The planned operations of these foreign
companies are dependent, to an unpredictable degree, upon United States government regulations on foreign investments
... >> (page 8 of Prospectus; page 30 of Filing); and in item (e) of Part I of its 10-K filed for the fiscal year
ended December 3I, 1971 (see Document No. 23) at page 12, Raytheon wrote that « Continuation of the United
States Foreign Direct Investment Regulation which became effective in 1968 might restrict the Company's ability
to develop its international operations >>, showing that the problem with these Regulations persisted for severa! years
after 1968.
CONTROREPLICA DEL GOVERNO ITALIANO 199
Unlike Italian bankruptcy law and that of the majority of other continental systems, ali
of which are notoriously « creditor oriented », the main characteristic of United States bankruptcy
law has always been that of being « debtor oriented », In other words, in Italy, and in continental
Europe in generai, bankruptcy is mainly considered as a sanction which befalls the insolvent
debtor in order to safeguard the prevailing interest of the creditors in a prompt and equitable
satisfaction from the proceeds of the sale of the debtor assets. On the contrary, in the United
States bankruptcy is rather a means placed at the debtor's disposal, to discharge his previous
debts and resume his activity on a fresh footing (<< fresh start doctrine ») irrespectively of its insolvency
(55). Thus a bankruptcy petition may be filed also by a solvent debtor (<< Voluntary
Cases »: Section 301 Bankruptcy Act), whereas in case of insolvency, the creditors may file a
bankruptcy petition against the debtor (<< Involuntary Case ": Section 303 Bankruptcy Act), but
there is no obligation for the debtor to file a petition himself. Furthermore, even an insolvent
debtor may choose between a bankruptcy petition under Chapter 7 of the Bankruptcy Act (<< Liquidation
") and a petition for reorganization under Chapter II of the same Act (<< Reorganization
»). In the first case, a trustee is appointed, who proceeds to liquidate the debtor's property
and consequently distribute the proceeds among the creditors. In the second case the debtor,
who normally retains his assets and continues to operate his business, prepares a <<~plan of rehabilitation
>> containing a complete list of creditors divided up into classes, indicating those who
will su:ffer impairment of their rights and those w ho will not, and how the payments will be made.
The pian will be binding for all concerned if it obtains the approvai of the majority of members
of each class of creditors or, failing this, if it is considered << fair and equitable >>by the competent
bankruptcy court.
What are the inferences that can be drawn from this with regard to the present case ?
First of all, there is no doubt that, at least as from March 1968, ELSI was to be considered
as << insolvent >> even under the United States bankruptcy law. Indeed, Section 19 of the Bankruptcy
Act prior to the 1 979 reform reads as follows: << A perso n shall be deemed insolvent within
the provisions of this Act whenever the aggregate of his property ... shall not at a fair valuation
be sufficient in amount to pay his debts "· ELSI had acknowledged its inability to pay the larger
creditors more than so % from the proceeds of the sale of its assets. Yet, the company would
have been << insolvent" also under the new criterion introduced with the 1979 reform (Section
303 (h): << ... the debtor is generally not paying such debtor's debts as such debts become due ... >>).
In fact, at the beginning of March, ELSI was going to face a complete lack of cash, as was confirmed
by the company management itself, and specifically by John D. Clare, who, at a meeting
with the President of the 'Sicilian Region on 20 February 1968 openly announced that <<(a) Feb.
23- Board Meeting; (b) Feb. 26-29- lnevitable bank crisis; (c) March 8 -W e run out of
money and shut the plant >>. (56)
Under United States law, ELSI would however not have been obliged to file a petition of
bankruptcy, notwithstanding its insolvency. The company would also have been free to choose
between a (voluntary) bankruptcy petition under Chapter 7 and a (voluntary) petition for reorganization
under Chapter I r. In the first case its assets would have been liquidated immediately,
(55) • One of the primary purposes of the Bankruptcy Act is to relieve the honest debtor from the weight of
oppressive indebtedness and perrnit him to start afresh ... »: Local Loan Co. v. Hunt, 2.92. U.S. 2.34, at p. 2.44· On
this point, see, also for further references to case-law, K!NG-CooK, Creditors' Rights- Debtors' Protection and Bankruptcy,
Matthew Bender, 1985, p. 777 et seq.; EPSTEIN, Debtor-Creditor Law, 3rd ed., W est Publishing Co., 1985
p. 138 et seq.; COLLIER BANKRUPTCY MANUAL, Matthew Bender, 1961, p. 176 et seq.
(56) Cfr. Document N. 19, containing the origina! handwritten minutes of the meeting. The Counter-Memorial
quoted the passage in the minutes of a meeting held on 2.0 February 1968, in which the President of ELSI,
John D. Clare, was reported as having drawn <<a percise time chart showing (a) Feb. 2.3- Board Meeting; (b) Feb.
2.6-29- Inevitable bank crisis; (c) March 8- W e run out of money and shut the plant » (Counter-Memorial, p. 81).
By a letter of 13 January 1988 addressed to the Court's Registrar the applicant Government supplied a photocoy
of the manuscript version of the same minutes along with an attempt to justify why a different text had been annexed
to the Memoria!. The Italian Government prefers to refrain from making any comment on this explanation,
but wishes to point out that the photocopy of the manuscript version fully confirms the accuracy of the quoted
passage. The President of ELSI really drew his • precise time chart » over a month before the requisition decree.
lf this fact was suppressed in a later version of the minutes, the only conceivable reason is that whoever altered the
text of the minutes thought that it could be embarrassing for Raytheon.
200 RASSEGNA DELL'AVVOCATURA DELLO STATO
while in the second case ELSI would have been able to continue its activity, in the hope of convincing
its creditors or, failing to get their approvai, to have the judge impose on them the « plan
of rehabilitation » providing for the so % payment of credits or even less. All this of course is
only theoretical because, in practice, it is anything but certain first of all that United States banks,
placed in the same situation of the Italian banks vis-à-vis ELSI, would have waited patiently
as long as the latter did, instead of filing an involuntary bankruptcy petition as they were entitled
to do. Moreover, in a reorganization procedure, the confirmation of an advantageous plan of
rehabilitation to a large extent depends on the actual capacity for recovery of the insolvent company
and ELSI could hardly be said to meet that requirement .... Be it as it may, it should not
be forgotten that ELSI was a company incorporated under Italian law and as such was subject
to the bankruptcy law of Italy and not that of the United States.
I I. More. The «lifting of the corporate veil » doctrine in Italian and United States law.
Again with regard to possible misunderstandings that could arise over the present case as
a result of actual or supposed differences between Italian law and United States law, the Respondent
Government wishes to point out that the action brought by the Italian banks against
Raytheon and Machlett, as the sole shareholders of ELSI, in order to recover the credits claimed
from the latter, can in no way be considered as discriminatory, or worse, as the product of the
umpteenth plot carried out against the two United States companies.
It has already been emphasized that judicial action of this kind is normal practice in !taly
in view of the widespread acceptance in legal theory and practice of applying the principle of
the sole shareholder's liability for the company's obligations, as established in Artide 2362 of
the Civil Code, also in the case in which a negligible number of shares are attributed to another
partner who is a pure figurehead (67).
But since in its Reply the Applicant Government continues to include among the damages
to be paid by the Italian Government also the legal costs incurred by Raytheon and Machlett
in the suits in question (68), it is worth here, in addition to recalling the remedies concerning the
situation under ltalian law, to note that the result would be exactly the same if the case was considered
under United States law.
In fact, also in the United States, the problem exists as to whether and to what extent shareholders
are liable for the obligations of their corporation. The conditions required « to disregard
the corporate entity » or « to pierce the corporate veil », in a given case are stili controversia!;
however, all authorities agree that, in some circumstances and in some particular cases, the corporation
may be disregarded as an intermediate between the ultimate person or persons or corporation
and the adverse party ( ... ) (69).
Generally speaking, the common significant factors which would have justified disregarding
a corporate entity have been under-capitalization, failure to observe formalities, non payment of
dividends, siphoning off of corporate funds by dominant shareholders, the insolvency of the
debtor corporation at the time, non functioning of other officers or directors, missing corporate
records, use of the corporation as a front for the operations of the dominant shareholder (60).
The conclusion to disregard the corporate entity may not, however, rest on a single factor but
often involves a consideration of a number of the above-mentioned factors; in addition the particular
function must generally present an element of injustice or fundamental unfairness. Thus,
to mention only those factors which are of particular interest in thé present case, the courts are
in generai more willing to « pierce the corporate veil » when the defendant is a corporation rather
than an individuai, and are particularly likely to find the parent business entity liable if, for in-
(67) Counter-Memorial, p. 93·
(68) Reply, pp. 156-157·
(59) FLETCHER CYCLOPEDIA CORPORATIONS (1983), l, p. 388 et seq. (with further references to both case-law
and scholarly writing).
( 60) FLETCHER CYCLOPEDIA CORPORATIONS, cit., p. 428 ,et seq. (with further references); HAMILTON, The
Law of Corporations, 2 ed., West Publishing Company 1987, p. 8x et seq.
CONTROREPLICA DEL GOVERNO ITALIANO 201
stance, the subsidiary and the parent are running parts of the same business, and the subsidiary
is under-capitalized, and/or if the subsidiary has eventually been forced into bankruptcy (61).
This being so, it seems clear that on this issue there are striking similarities between Italian
law and the law of the United States or, more precisely, the law applied within each of the individuai
states of the Union. On both sides of the Atlantic Ocean there is no hard and fast rule
as to the conditions under which the corpora te entity may be disregarded; at the same time,
according to both the Italian and the United States laws, as a generai rule, the « corporate veil »
may be « pierced », and the liability of the shareholder(s) for the obligations of the corporation be
aftirmed, whenever the corporate fiction is being used by the corporation itself to defeat public
convenience, justify wrong clone either to third parties dealing with the corporation or internally
between shareholders, or to perpetrate fraud or other reprehensible conduct.
This is no t the piace to express an opinion on whether or no t the I talian courts w ere right
when, although asked to do so by a number of banks having suffered substantial loss because of
ELSI's insolvency, they repeatedly refused to « pierce the corporate veil » of that corporation
and to allow the banks to recover their credits directly from its two shareholders. More than
one distinguished scholar, when commenting on the decisions rendered, has argued that on that
occasion the courts may not have taken into sufficient account the fact that ELSI was a typical
example of a wholly owned subsidiary- Raytheon owned 99.15 % of the shares while Machlett,
who held the remaining o.85 %, wàs just another wholly owned subsidiary of Raytheon- which
long before it went bankrupt was kept in a condition of clear under-capitalization by its parent
company (62). In the light of the foregoing remarks, however, it should be clear at least that
there was absolutely nothing unusual in the fact that the Italian banks tried to recover from Raytheon
and Machlett what they had been unable to get from ELSI. Any competent lawyer in either
ltaly or the United States would have urged the banks to do so, and it may well be that in the
United States the banks would have been more successful than they actually were before the
Italian courts.
12. The quality of ELSI's plant and production.
The considerations made so far concerning ELSI's insolvency already contradict the contention
that the company purchased by EL TEL was an industriai jewel, to gain possession of
which a sort of plot was hatched. Indeed it does seem strange that such a highly productive
company should have such a negative economie performance and that its promoters should
make the decisions they did (i.e. Raytheon decided not to invest further money in ELSI, while
ELSI dismissed the entire work force).
In fact, the following has to be saicl:
(a) ELSI's production was of a low quality. The expert of the bankruptcy court, Dr.
Mercadante, expressly mentioned in his Technical-Accountancy Advice goods being returned
by customers and defective products left in customs, etc. (63).
(b) An unhappy site had been chosen for the plant, with some of the sections actually
situated at different levels (64).
(c) The way the plant was structured was completely negative, because it was badly built
and there was no adequate planning (65).
(61) FLETCHER CYCLOPEDIA CORPORATIONS, cit., p. 455 et seq. and p. 472 et seq. (with further references);
HAM1LTON, The Law of Corporations, cit., p. 91 et seq.
(62) See, among others, PELLIZZI, Unico azionista e controllo totalitario indiretto, in Giurisprudenza commerciale
I98I, II, p. 6IS et seq.; S. ScoTTI CAMUZZI, Unico azionista, gruppi,« lettres de patronage >), Milan, I979, pp. 30
et seq.
(63) Technical-Accountancy Advise on Raytheon-Elsi S.p.A., Counter-Memorial, Document N. 36.
(64) Affidavit of Ing. Cavalli, Document N. I and the Remarks of Dr. Alessandro Alberigi Quaranta, in
Document. 20.
(65) Affidavits of Ing. Cavalli, Document N. I, of Ing. Ravalico, Document N. I4, and the Affidavit of Ing.
Cammarata, Document N. I 3.
202 RASSEGNA DELL'AVVOCATURA DELLO STATO
(d) The production lines were lacking in concrete functionality. The products had no
market attraction and the semiconductor production has turned out to be a failure. Only a small
proportion of the television components which were produced could be absorbed by the television
set market. Other devices for television were now obsolete as they applied to blackand-
white TV, while colour was becoming increasingly popular in Italy. This is proved by the
fact that when EL TEL purchased the company, in 1969, it changed its entire production (66).
It is probably worth reporting fully what was declared by Ing. Busacca, who was working
for ELSI at the time and was in charge of microwave tube design, and by Mr. Ravalico, the
manager of EL TEL. The words of those having actually experienced the events are self explanatory.
According to Ing. Busacca:
'' ( ... ) As at 29.3.I968 Raytheon-Elsi had five production lines:
I. Semi-conductors
2. X-ray tubes
3· Black-and-white cathode ray tubes
4· Telephone surge arresters
S. Microwave tu bes.
The company's technical and economie situation can be described as follows:
- Semi-conductor line: the machinery was unserviceable and idle because i t had been designed
for germanium technology, which had been obsolescent for many years; an attempt was
in progress to produce silicon diodes which, although technically valid, had no significant market.
- X-ray tube line: the machinery was very old and the manufacturing processing was carried
out at great risk to the operators. The product was quite good but there was no scope for
the research required to develop it, for improvement to the plant or for winning a share of the
market away from the large electromedical apparatus constructors, who had their own production
lines.
- The black-and-white cathode-ray tube line involved the majority of the active work
force in operations, and ought to have been automated but it was not because black-and-white
consumption was heading for certain decline. The processes were rather uncertain although the
quality often happened to be good.
- The telephone surge arrester line was based on the exploitation of a patent and utilized
makeshift equipment and involved high risks, since Cobalt 6o radioactive materia! was included
in the products during processing.
- The microwave tube line was based on the nÌarket represented by the HA WK missile
system and a small research activity had been started up.
- On the whole, the plant was to be considered uneconomical: The plant engineering and
available technologies were generally obsolete. The machinery was intensively exploited, old
and hard to manage. The work force was comparatively unskilled. A negligible impulse had
been given to independent research and there was no available pian to renew the production lines
(even by means of licensing) ( ... )" (67).
According to Rag. Ravalico, on the other hand:
« ( ••• ) IRI cc interested" SIT-Siemens in proceeding with the acquisition of the bankrupt
company, ELSI.
The term cc interested" is actually inexact, because no one was cc interested" in ELSI because
of its well-known technical obsolescence and commerciai incompetence. But to prevent trade
union unrest- the year was 1968 - and sit-ins in via Veneto in front of IRI head office, it
(66) See again Affidavits of Ing. Busacca, Counter-Memorial, (Document N. 44), of Ing. Ravalico, (Document
N. 14), and of Ing. Cammarata, (Document N. 13).
(67) For the whole text of the Affidavit, see Counter-Memorial, Document N. 44·
CONTROREPLICA DEL GOVERNO ITALIANO 203
was necessary to « take an interest in the business», mainly for reasons of law and order. I per·
sonally directed the take-over operations in my ( ... ) official capacity.
After obtaining possession of the ELSI company, initially as lessees, we found the following
situation:
I. The generai facilities . were inadequate, dilapidated an d badly designed from the yery
beginning. The company had not grown according to an organic economie development plant.
l t had developed on a day-to-day basis. One of the consequences of this was that the production
facilities had been sited haphazardly, in temporary structures etc. As a result, most of the generai
facilities - after we had taken possession of them - were only scrap metal, and were sold off
as such, because they · necessarily had to be replaced by viable generai facilities.
2. The production lines were ali old, broken down and obsolete. The semi-conductor line
(the most bankrupt), the x.:..ray tube line, the microwave oven line etc., which had been of inefficient
production capacity ab origine, were ali written off at once as scrap. It was not that they
were obsolescent as a result of having been shut down pending the bankruptcy proceedings.
They were obsolescent due to prior industriai and technical reasons. An attempt was made to
salvage the TV cathode ray tubes line, and the line producing microwave tubes for military use.
The first was a failure, and the sècond was successful thanks to considerable intervention.
The cathode (picture) tube line was organized using absolutely outdated technology, and it
manufactured products that were completely useless on the market. These were black-and-white
23" picture tubes that were totally unsaleable on the Italian market in those years. And they
were made using glass from Russia, with absolutely prohibitive transportation costs to Palermo,
as one can well imagine. Since the technology then being used was no longer sound, an attempt
was made to negotiate to be able to continue using RCA technology. But even this attempt proved
negative.
It was not enough to change the technology: it was necessary to start ex novo, with huge
new investments to cater for the demand of a market that was now moving towards colour TV.
ELSI's commerciai network was almost non-existent, and it had a bad commerciai image.
The microwave tube line was continued, because the prospects existed for the products
to be absorbed on the market, providing work fora few dozen members ofthe company's x,ooo·
plus work force.
But it became necessar.y to renegotiate the assistance contracts with Raytheon, in order to
be able to obtain the technical information and updates needed, in view of Raytheon's extremely,
and quite unjustifiably, high royalties. Mter a short time, it became clear that this attemp could
not proceed further, and it became necessary to think about starting up work on completely new
products that would enable the company to retrain severa! hundred workers for new jobs.
3· The stocks were not able to cover even the cost of managing them. The stores were
full of unsaleabie picture tubes, above ali, and old, wholly unusable materials that were for the
production lines that were going to sold off as scrap.
4· Through EL TEL S.p.A., which it controlled, SIT-Siemens had to invest over Lire
4,ooo,ooo,ooo immediately in order to buy up Raytheon at the judicial bankruptcy auction held
on 12 July I969.
It later had to invest about 3,500 million between 1969 and 1972 to restructure the plant,
generai facilities, and the machinery and production lines, and to retrain the work force.
5· ELTEL then moved the production of the electronic parts of the power units for the
telecommunications facilities from L'Aquila to Palermo, at the former ELSI factory. The only
way to keep the local jobs was to rebuild the whole factory, in practice, because as Raytheon had
left it, the factory was absolutely useless in technical and production terms, and had only been
taken over as a bankrupt concern on purely sociai grounds ( ... ) >>,
(e) The ELSI company was Iacking not oniy in industriai features but aiso with regard
to its commerciai functions. Among other things the oversized work force meant prohibitiveiy
204 RASSEGNA DELL'AVVOCATURA DELLO STATO
high costs, such that the products, which were in any case delicate, were not competitive on
the market;
(f) the only real advantage ELSI had was its work force, even though it was too large for
a company of that size. The work force appears to be technically well trained (although not
everyone agrees with this: see Ing. Busacca) (68), and this explains why someone ultimately purchased
the company in question. However, the existence of well-trained labour is not enough
to render an off-market company attractive.
Furthermore, the company had ceased to be a going concern directly because of the ELSI
management. The halting of the production lines took piace in early March 1968 (69
). Therefore,
when the events lamented by the Applicant Government took piace, ELSI was no longer a functioning
company. Thus, the hypothetical orderly liquidation would therefore have involved
nota company that was operating somehow or other, but the remains of a structure which had
proved so uneconomical as to have been already dosed down. Ali that was worth keeping, was
the work force which the ELSI management had already proceeded to dismiss and who saw their
jobs disappear.
12.1 ELSI's requests for benefits to which it was not entitled.
One further consideration is to be added. Again in its Reply the Applicant Government
complains of the failure to grant benefits that were promised (it is not dear when or by whom),
for which it blames the Italian Republic.
The truth of the matter is that either ELSI was entitled by law to such benefits, in which
case it should have taken legai action if they were withheld (but this was not the case and ELSI
did not in fact take any action), or it was not, as we shall now proceed to demonstrate; in the latter
case, the only alternative was for ELSI to request that benefits to which it was not entitled
be granted out of « benevolence n. This is what ELSI asked, receiving the refusal that anyone
requesting an illegal favour should expect to get.
Even for the type of production concerned, ELSI was not entitled to such benefits.
The Applicant complains of the failure to apply to ELSI's favor Artide I of Law N.
835 of 6 October 1950 according to which the State administration was under an obligation to
reserve the « supplies >> of materials provided for in legislative decree N. 40 of 18 February 1947
to existing industriai facilities in the Mezzogiorno (Southern Italy). In particular, according to
Artide 16 of Law N. 717 of 26 June 1965, in force at the time of the events, the Government
was supposed to reserve 30 % of its supply contract for companies operating in the Mezzogiorno
(7°).
Under Italian law the supply contract is a contract by means of which one party (in the
present case, the Government) purchases goods or services, on a continuai basis, from another
party for its own use and (in the case of the public administration) to carry out its statutory tasks.
This means that the materials in question have to be purchased ready for use immediately, without
requiring any further assembly or convertion. This obviously did not apply to ELSI's products,
since they were simple components and not finished products, and were therefore of no use at
ali to the Government, who would have had to sell them to other companies to be assembled
and used in different products. This is not allowed by Italian law, since it would mean that the
Government would in some way act as « go-between n between private companies.
(68) Counter-Memorial, Document N. 44·
(69) See the dismissal letter addressed to the employees of ELSI, dated 16 March 1968 (Document N. 21)
and to Ing. Busacca (Document N. 22). It would be appropriate to point out here that a partial - and regretfully
unfruitful - effort to make ELSI operative again was carried out by the Mayor of Palermo himself, through the
assignment - conferred upon Ing. Laurin, an ELSI senior company director - to direct and take care of the plant
during the requisition. This remark, already made in page 84 et seq. of the Counter-Memorial, is ignored in the
US Reply.
(70) The texts of the relevant rules are reproduced in Document N. 34·
CONTROREPLICA DEL GOVERNO ITALIANO 205
I t is for these reasons, which are seen to be based putely on legai provisions and dd not include
any intention to harass ELSI, that the Italian Goverrunent could not grant the benefits
requested, as also Minister Andreotti pointed out in his speech in Parliamentof 25 July ig68 (71) •
.. ·. Again with reference tothe benefits extended un der Italian legislation to companies operating
in the Mezzogiorno, the Applicant notes that also other norms involving special freight discounts
for materials used or produ(;ed by such companies were ndt .applied to ELSI.
However1 also thè ahove norms were not applicable to ELSI's products, and for the same
reasons · ptevit:n;iSly outlined, ·
Artide 15 ofLaw N. 717 of 26 }une 1965 and the respective ministerial decrees implementing
i t, both dated 29 March I 967; provided for benefits in the following cases:
(a) r11w materials and semi-finished products to be used for production purposes;
(b) b\lilding. materil'!ls, lllachinçry and anything else required for the reconstruction,
transformat1on,. extension and modern.ization of industriai plants;
(c) transport outside Southem ltaly of fint"shed products .
. Raytheon requested precisely the application.. of the. benefits provided for in section (c)
aboyel since, !Il> w;:t.fl stil,ted als<,>. in the MemOJ;il;l,l, the size and weight of the products meant high
freight costs. . . . .· . .· .
However, as can be seen from the te::;:t of the provision, the only and decisive condition for
its app}iqation w:as represente~;l by the fl'!ct that the products concern.ed were finished products
and therefore required no fùrther assembly. This was not true in the ELSI case.
Therefore, it Wl'IS n,ot possibile t(). grl'lflt even this benefì,t to ELSI.
It Wl'IS therefore· not that the Italian Government caused damage to ELSI but rather that
ELSI was <;lemanding benefits from the Italian . Govemmel;lt in the form. of « aid n beyond i t
was legally entitled to. After realizingthat it hadmade a l:>ad investment and that it had mismanaged
it, Ra}rtheon in other words did its best to pin the cost of all its own mistakes on the
Italian G()vernment. T o try and achieve this it exploited the n.eed, which was particularly strongly
felt .in ltalyat the time, to protectjobs, :Failin.g to attain this objective, the decision was taken
to close. down. the plant, an act which was als.o in line with the policy of generai reduction of
United States investments abroad.
13. The terms of the sale.
'I'he Applicant Govemment .contends that « either as a total package or individually to maximi~
e the reaJizable price )) e~), (( each productline could b,e sold as a separate package, including
the respective tedmology, contracts, customer and supplier bases, and established name and
reputation. to buy~s elsewhere in Italy, Europe or Japan.>> (13). This inference is drawn by the
.1\pplicant Government froin the Affidavit of Mr Scopelliti. But what prospects could there have
been for such a; badly structured plant, production lines resulting in such large failures, products
of suçh little worth that they were often returned. to the seller (and in any case had no market
appeal), techn.ologies that proved to be so ineflicientas to bring criticism also from the Bankruptcy
Court expert, Pr Mercadante ? In order .to be able to reason from inferences, such as
the likelibood of selling ELSI as a going · concern (74), the. inferences must based on adequate
premises. Otherwise they may turn out to be purely gratuitous. In the case in point, the necessacy
premises are not to be found, becaus.e the poor industria! performance resulting in the
ELSI debacle, theproduction and marketing deficiencies observed, the structural shortcomings
found in the plant, ali add up to an overall picture of the Palermo plant such as to render improbable
any course of action other than to sell the plant as a whole.
14
(71) Memoria!, Annex 46.
( 72) Reply, p. 127.
(78) Memoria!, Annex N. 17.
(74) Reply, p. 130 e' seq.
206 RASSEGNA DELL' AVVOCATU::..:R::..:A~D::..:E::..:L::..:LO~S::..:T::..:A::..:T.::_O ___________ _
14. IRI's role in the acquisition of the plant.
In the light of what has been seen above, it has little meaning to speak of IRI'S interfering
with the bankruptcy proceedings. It is easy to prove the inaccuracy of the contentions presented
by the Applicant Government in this context. (15)
IRI was established by RDL (Royal-Decree Law) N. 5 of 23 January 1933, converted into
Law N. 512 of 3 May 1933 (16). It was subsequently modified by RDL N. 905 of 24 May
1937. An institution was set up, whose action would be directed mainly towards the technical,
economie and financial reorganization of national industriai activities.
IRI became a public agency with a permanent structure, which was given the task of managing
the shareholdings in its possession, of undertaking new industriai ventures, also in cooperation
with private capitai, and of carrying out initiatives in the field of vocational training.
The lnstitute's activity has therefore to be set in the broader framework of State holdings,
i.e. of publicly owned shareholdings in profit-making companies.
It is true that IRI enjoys financial independence, having its own << endowment fund » (Artide
x8 ofthe statute as approved by Decree-Law N. 51 of 12 February 1948)(77). It directly owns
the shares that it possesses, which differs from the case of the direct participation of the State,
which become part of the latter's assets. IRI operates in accordance with the profitability criteria
typical of a market economy. It has its own organizational structure, consisting of a President,
a Vice President, a Director Generai, a Board of Directors, and a Board of Auditors.
In other words, the IRI group comprises a group of companies, which operate in accordance
with the laws of the free market.
The << social » side of State holdings comes from the special attention focussed on the creation
and preservation of jobs. However the purpose of IRI is neither to salvage lame companies
(for this purpose there is another agency in Italy, GEPI, for those cases in which the salvaging
of a lame company presents particularly important social aspects) nor to engage in initiatives
according to choices made by public authorities. Only occasionally IRI participared in the acquisition
of unprofitable companies, acting on the instructions of the Italian Government.
In the telecommunications sector the IRI companies are grouped under STET, a jointstock
company quoted on the Milan Stock Exchange. FINMECCANICA, with whom ELSI
had meetings at the time it was seeking an ltalian partner, is not a << division » of IRI, but a
jointstock company which, like STET, is wholly subject to the norms regulating private companies,
and is quoted on the stock exchange.
Raytheon had already contacted IRI at a time when ELSI had not yet met its inevitable
doom. However, IRI was not, and could not, be interested in entering into partnership with
a company in such disastrous conditions. Subsequently, when deadlock was reached in the
ELSI bankruptcy proceeding, IRI was obliged to intervene, mainly to safeguard employment
and the situation of the Palermo workers who had been thrown out of their jobs.
The heart of the matter remains the question of whether the ELSI company was worthless
or not. We have seen that the company had no value. This explains why the attempts by the
politica! authorities, especially the local authorities, to find ways and means of salvaging it were
unsuccessful. The cost of possible comprehensive solutions for running an obsolete plant was
obviously too high for an organization that must compete according to the rules of the market.
The formula of the sale of ELSI as a going concern is constantly repeated by the Applicant Government.
The Reply goes as far as to state that, while the Italian Government had publicly
announced its intention to purchase ELSI, EL TEL - an IRI subsidiary - << boycotted the first
three bankruptcy auctions, seeking to buy only some of the assets at a lower price» (18). However,
this is contradicted both by the facts of the present case and by other events in which IRI has
been involved.
(76) Memorial, pp. 16, et seq.
(76) Document N. 31.
(77) Document N. 28.
(78) Memorial, p. 16.
207
CertainlYi ELSl was of no interest t& lRl as ìt was< This waa confirmed by the fact that,
after the p'Urchase, EL TEL had to spend large amounts _,. as much as Lire· 3,soo,ooo,ooo (79) .,...._
to .. r!).strUctiJre .the plant an d completely. changé its production,; ·. even transferring · to i t some
proctnctt()n Ui:les ~hich were previ()USly operating elsewhere. ·.· A,fter !ts .• purchase• · by ELTEL,
th:l} $l..SI 'Pll:lri~•wl!.s ;<:t:~nve:rt;ed.f(}r t:he· I>tt'ftiuction mainly• of•electric contro}·· panels~·· aproduction
~1W~~à=~~a@)~~n~\W~ùfl~&tm# ~ni~~~~~~~~n~2;n~;:~;~~ ~:sst!tf~d!t:!:~~\:!:~~~
·• .a ·~QÌllg cot:tcematalh•··•'Yhlìt• 1;hey lii(Jtq~llyJ:ìutchased.was the•·si~··on which 1;he. ELSI · plant was
Iocated, taxqng over its oversiied but qualified work force~ It is. thérefhre. pointless to claim no w
t11a.t ... IRJ.pl()t~e<:l.•~:ì114.com'~Pjr~<:l .. to..ol>tlliJ:l .. th~.··l?J:Q.dvcti()i:l .. linell •.• whiç1tweredi!!fl"l<'l:tltled, .... sold for
sérap and té{;llaced by others, or to obtain thé technology, whiéh was not use<:l, b!)cause, as well
a.s ()psole:ter it)Vas not relevant to the industriai aims then actually pursued. · .· It. is. thus not surP#
st#g thatlRl a:nd• S'l'ET were reb.tct~;~nt to t!ike·over à plai:lt wlll:ch they,··like everybody else,
lhlewto be useless as a specific oper:~;~ting structure and ·in tbe predictable need of productive
reorganizatlon. .· ·. . . . . . ..•.. .. . . . ·.. ·.· ... · .. · .. . . .. . . .·. .·• . .· ·.. •
· · • Futthermore; if ELSl hati been; ifhot an. i( industriai j~el >>, atdea:st something witli some
m~;~rker appeal,. as. the Applicant Gov~riUl'lent. is now c;laitning, '\VhY \Vas . it that no bìdder cain.e
fot\V~rd, p~~t~()Ulttrly whe11 t~e J:>à~p.tcy àftct16:Q~ )'itere clese.tted f' The ij;eply :us~s the term
Ì~tY~:!~il'~le{~;~··~ti~!~~~s~a;I~11~~~A&tg..f(~lWcit•••~f9~1~a~~r·sWeh~:: ·~~!v~!u!~;
~volve<:l, ~ (ii~çussions with ~LSI, had to neglld::tte the reo:rg~;~nization of the Jtalian thermoengln~
er1ng :sector with other entrepren.eurs. As the newspapers reported, FINMECCANICA
a11<:1. .. its s'!ll:!s~cti<'IJ:Y A.nsaldo IOit>seci thtì. hoì.lt: F:ranç() T o sì a.nd .A.SEA Brown . :B<Jveri deemed it
~tifJt~~h~~i~!r!~]i~~irt:i!~~~~jUi~~jt~!lib~~eiliaf~t~Jiall~\We~l~f~fCJt~~~t~0tW!:~;
the E:C.$1 ~pp{ej( they h11ct a rili:t14, J(), jl,lst ~;~s. no grw preventecl. Francg Tosi·. (a member of the
ft{Jf&W~~YR~é~t.·~e1~6i.·(~J?~fti~h~e~a!~o~•·ffȧW,~!~lf;l~r~itc~:~~tJ!1·~1~u:g ~~
bujr the allfigéd << indusùiial jewet >i. clltiri<>f be a:scri~ed. to. boycottirig by· IRI, · which ìn any case
has ;never been proved. I t '\VI,'IS m,uch t;~:t(>re simply due to the easily understandable fact pointed
o(lt earlie:r;. i; e., that no orie wanted thé Palérmo .. pian t,. eitheJi as a whole or in part. And to tell
the truth, no>evidence has.>even been produced of anybody else's interest being boycotted.
Wl>,~;~t is true.is that the .bankruptcy auctions fall..ipto line. witb wh~;~t .. h~;~s already been demonStr~
ted: ELSiwas nota goin.g concer~ but a ruipect companYt which nobody wanted. And
wll.en .the groupJeacìer .S'l'ET was oblige<:l tq}nteJ:Verie in ord!.lr to s~;~ve the jobs of the now
uri.emJ?Ioyéd ELSl work force, ELTEL had simply to make thebest <>f a bad. bargain.
15. Concluding remarks • . ·
ln actl.lalJac:;tthe. c:ritic~ms advanced. by thl:l Applicll:J:lt· QoyeriUl'lentare hase<:l on .ey~n m<;~ re
cot'hplicatec:l c:;oJ:lsidel'ìtt1cu:1s and \lse a retbo#c~i • tdc:;k tb~tt can easily be exposed. Anyone rea(,lmg
th.~ <:locq_ments presented to the Gov:rt, starting witi;I.Jhe latest one, can see that the Reply. praç.,.
tically takes for granted what is set out btiefly in the Memoria:! and explained at greater length
in the 1974 Claim. In other words, by no longer going into the facts in detail, an attempt is
Itiade to gi:.Ve the ltnpression that the àiieged facts are obvious .. On the contrary, these are merely
assertions, or ìtiferences, which are wholly unproven and actually do not stand to reast>n;
(79) Affidavit of Ing. Ravalico (Document N. 14).
(SOl Affidavit of Ing. Ravalico (Document N. 14), and more generally, Affidavit of Ing. Cammarata, (Document
N. 13).
(81 l On these facts and in particular on the disappointment o.f IRI for · the agreement it failed to reach,
see the article published in Il SOLE-24 ORE, 3 October 1987, (Document N. 29).
208 RASSEGNA DELL'AVVOCATURA DELLO STATO
The 1974 Claim devoted considerable space (26 consecutive pages) (82) to describing, without
proving, as must again be emphasized, a basically fraudulent plan to acquire the allegedly valuable
ELSI plant at below its fair market price.
The contention of the United States Government is based on the following premises: the
alleged existence of a sort of plot hatched by State holding companies, the Mayor of Palermo,
bahks and the bankruptcy receiver, focused on a valuable company, that IRI managed to
acquire in an underhand way. As has been pointed out above, no such valuable company existed
and therefore the hypothesis cannot be true. But the logical and legai coherence of the entire
argument is also open to criticism.
The sequence of events that emerges from the outline of the facts contained in the 1974
Claim is as follows: '
- on realizing that it lacked the capacity to attain a competitive size on the market, ELSI
started looking for a possible I talian partner;
- IRI was approached, but was no t interested;
- the bahks, controlled by IRI, refused the proposals made by Raytheon and the ELSI
management;
- the Mayor of Palermo issued the requisition decree;
- the bankruptcy trustee leased the plant to an IRI controlled company;
- an IRI subsidiary, EL TEL, purchased the plant after forcing the price down.
However:
(a) the need to find a strong partner is the first clue to the fact that ELSI by itself was
not capable of attaining a competitive size. The tone used in the applicant Government's Reply
was one of substantial reproach to the Italian Government and IRI for not having rushed to
ELSI's aid. No one appears to have explained, however, why this should have been done, or,
if it was true that ELSI was a valuable company, for which compensation is now being demanded,
why the participation of a third party, i.e of the State holding companies, was being begged;
(b) IRI's refusal was explained at the time by its lack of interest in investing in a company
with a production like ELSI's; and in fact, when EL TEL, an IRI subsidiary, did purchase the
company from the bankrupt's estate, i t immediately set about changing the production lines (83);
(c) the banks' refusal to accept an « orderly liquidation" which would halve their credits
is presented as an irrational and in any case spiteful attitude on their part, and basically attributable
to IRI, by whom it is assumed that the bahks were controlled, and through it, by the Italian
Government. However:
(c1) when a debtor offers to pay only a part of his debts, he is the one who is normally
reproached and not the creditor who refuses the deal. Furthermore, under the Italian Civil Code
(see Artide 1181) (84), the creditor is entitled to refuse partial payment;
(c2) not all the bahks to which ELSI owed money are controlled by IRI, which in its
turn cannot be portrayed as an agent of the Italian Government, so that the lihk between the
behaviour of the bahks to which the money was owed and the Mayor or the Prefect of Palermo
is non-existent; in this case i t is hard to see w ha t the Applicant Government has to complain
about;
(d) in Italy there is the separation of powers, especially between the judiciary and the
executive. Therefore, to assume that there could be a concerted attitude between the receiver
appointed by the bankruptcy court, the Mayor of Palermo, and IRI is not only a contemptous
argument vis-à-vis the Italian judiciary, but also an argument quite out of place.
(82) See Counter-Memorial, Unnumbered Documents, vol. I, pp. 41-67.
(83) See Affidavit of Ing. Ravalico, Document N. 14.
(84) For the English text of Article n81, see Document N. 16.
CONTROREPLICA DEL GOVERNO ITALIANO 209
In ali probability the matter is much simpler than the highly imaginative version served
in the Memoria! and Reply of the Applicant Government. The Respondent could simply rest
its case on the statement that · the Applicant Government has produced no evidence of linked
behàvìour, and linked unlawfully, between conipanies, local authorities and judges. And in view
of the seriousness of such a ()barge, reasonable caution should be exerted when asserting that
suchlinlfs eXisted. However, thefa.cts alleged bave inducedthe Italian Government to go beyond
a rnere pa,ssive denial of theApplicant's argurnents and to stress the enormity of the allegations.
· ELSl was an unsuccessful deal, at le.ast from 1962 on, or rather an unsuccessful speculation,
becaQse Raytheon believed i t was possible to make a profit by shelvitl.g the State an d local authorities
with the costs of an obsolete company, the~;eby exploiting the need to create jobs in the
Mez~ogiorno ($5),. According to Ing. Busacca, ELSI did not distinguish itself either for its technology,
nor for the state of its plant .. According tq Rag. R.avalico; its .products were obsolete and
o:ff market. According to Dr. Mercadante, ELSI's products were defective. According to its
balance sheets, the company was undercapitalized. Obviously ali it produced were losses, and
more losses.
It was the obvious concern of the Italian local and centrai authorities to provide the maximum
possible employment. In high unemployment areas like the Mezzogiorno, the closing of
a company normally gives rise to tènsion and a necessary degree of solidarity. Raytheon was
ready to take advantage of ali this, both at the beginning, when it benefited from financial inducements,
and in the end, when the wages of its 168 employees were paid by the Sicilian Regional
Government. As part of the generai pressure applied to save the company Raytheon contacted
IRI. However, in view of the economie uselessness of the ELSI plant, IRI made the correct
managerial decision not to bave anything to do with it, fully aware that once it was caught up
in the a:ffair it would bave trouble coming out of it unscathed. Raytheon then made another
attempt using an illusory rehabilitation pian in which it claimed that the banks were prepared
to accept so% payment. However, to anyone examining the matter thoroughly, it was clear
that no such conclusion was warranted since the ELSI plant had no market value except on the
scrap market (and most of the plant was actually sold o:ff as scrap) (86) while no commitment
to « cover >> ELSI was forthcoming from the parent company (since the promises mentioned by
the Applicant Government are only hypothetical). With no further hope of (a) receiving government
orders, as no reason exists for giving them to a company that produced badly, (b) of association
with the State holding system, which had no reason to waste its money on a company
that produced losses, and (c) of an agreed rehabilitation pian, which was intrinsicaliy unfeasable
and in any case involved cuts in the creditors' share which the creditors would bave no reason to
accept, particularly since in Italy the bankruptcy proceeding is required by law; Raytheon stiffened
its attitude in the hope that the State holding companies or the local politica! authorities
would give in at the last moment (the payment of the wages of 187 employees by the Sicilian
Region raised hopes of a possible bail-out) (87). ELSI issued a communiquè, which was given
wide circulation, to the e:ffect that, as from x6 March 1968, the company would cease ali activities
and that as from 29 March the employees would be laid o:ff. I t is interesting to note the ton e of
the ELSI communiqué: it said in effect that Raytheon had invested many billion lire, and that
the Italian Republic did not intend to mount any rescue operation. The only thing it omitted
to communicate, and indeed tended to ignore, was the fact that the company was economicaliy
worthless and financially ruined, and that the Italian legai system does not consider that an insolvent
debtor has the right to receive aid from anybody, particularly when he is responsible,
as ELSI was responsible, for having wasted someone else's money (see the financing received)
in products capable of making only losses.
( 85) Therefore, for instance, ELSI benefited from soft loans, which were provided for in the law: see
Counter-Memorial, pp. 77 and 78. The Reply, however, avoids any mentioning of these soft loans.
(86) See Affidavit of Ing. Rabalico, Document N. 14.
(87) On the attitude showed by ELSI's management in those criticai days, see the article published in
L'ORA, Document N. 29.
210 RASSEGNA DELL'AVVOCATURA DELLO STATO ---------------------
As was to be expected, the ELSI work force staged several demonstrations (88
). On 25
March a generai strike was actually called in Palermo to express solidarity with the ELSI workers.
The local authorities were thus obliged to intervene. Raytheon, realizing that it now had the
opportunity to blame others, and not its own errors, for the company's debacle, decided to speculate
on the events. This was the beginning of the complaints.
It may be objected that this is only surmise. If it is, it is no different, however, from the
surrnise contained in the contentions of the Applicant Government, except for some fundamental
aspects: the constant losses incurred by ELSI, out of all proportion to the capi tal invested, are
an unchallenged fact; the ruinous state of the ELSI company is an unchallengeable fact, since
it can be worked out from the figures and from the proposal to pay so % to the creditors; the
state of obsolescence of the plant is equally unchallengeable, as it is confirmed in several Affidavits.
The fact is therefore that ELSI and Raytheon were aware of the disastrous situation of the
company and of the impossibility of presenting to the market a company that was losing money
so fast. And yet, despite these facts, one still finds a request for compensation of a « full value »
that has no connection at all with reality.
(BB) On this point, see also the Affidavit of Avv. Maggio, Document N. 3·
PART II
THE JURISDICTION OF THE COURT
Since the two Parties expressly agree that the Court has jurisdiction over the dispute, under
Artide XXVI of the Treaty, «in so far as it relates to the interpretation and application of the
1948 Treaty and the 1951 Supplementary Agreement » (1), it is hard to see why the Applicant
finds it expedient to point out that « the Respondent is now barred from raising an objection » (2)
Over many years of negotiation on the daims put forward by the United States Government on
behalf of Raytheon and Machlett, no intention of raising an objection to the Court's jurisdiction
with regard to an application based on the Treaty has ever been voiced by the Italian Government.
The Respondent Government only expressed the view that, given the new position taken
by the United States Government on many issues in its Memorial, the ltalian Government would
have been entitled to insist that « the basic contentions concerning the interpretation or the application
of the Treaty should have first been put forward in diplomatic negotiations >> ( 3). However,
as the Counter-Memorial made dear, «in the interests of a complete settlement of the
dispute, the defendant Government refrains from putting forward » any request for the Court
« to dedare that the conditions set forth in Artide XXVI of the Treaty have not been fulfilled » (4).
There is little accuracy in the Reply's contention that « the United States has repeatedly
raised with the Respondent since 1972 the legai daims now before this Court» (6). As a perusal
of the Memorandum of Law presented in 1974 and of the Memorial shows (6), the Applicant
Government has significantly altered its basic contentions concerning the Treaty and the Supplementary
Agreement. This may be an embarrassing fact for the Applicant Government to
acknowledge; i t cannot be denied by noting that the same Government has persistently daimed
compensation (1).
(1) Counter-Memorial, p. 97· In quoting this passage the Applicant Government's Reply (at p. 133) omits
the words << in so far >>. The omission may be inadvertent, as the jurisdiction of the Court over the dispute dearly
rests only on Artide XXVI of the Treaty, which reads as follows: << Any dispute hetween the High Contracting
Parti es as to the interpretation or the application of this Treaty, which the High Contracting Parties shall satisfactorily
adjust by diplomacy, shall be submitted to the International Court of Justice, when the High Contracting
Parties shall agree to settlement by some other pacific means ~.
(2) Reply, p. 135.
(3) Counter-Memorial, p. 97·
(4) Counter-Memorial, p. 97·
( 5) Reply, p. 30.
(6) See Counter-Memorial, pp. 97·
(7) The Reply (p. 135) condudes as follows: <<Since the Respondent has consistently refused to pay compensation
for the damages suffered by the United States, the dispute has not been satisfactorily adjusted by diplornacy
and is now properly before this Court pursuant to Artide XXVI of the Treaty ~.

PARTIII
THE ADMISSIBILITY OF THE CLAIM
The Italian Government has contended in its Counter-Memorial that « the United States
Government's claim is inadmissible in view of the fact that local remedies were not exhausted
by the two United States corporations on behalf of which the claim is put forward » (l). The
Applicant Government attempts to justify the admissibility of its claim in its Reply (2
). However,
the United States Government does not contest that the objection that local remedies were
not exhausted may be made in relation to a claim under the Treaty. It is also common ground
that, in order to establish whether local remedies have been exhausted, '' the only possible test
is to assume the truth of the fact on which the claimant State bases its claim » (3
).
One of the Applicant Government's contentions is that « the Respondent is estopped from
asserting that there exists any requirement to further exhaust local remedies » (4
). It is difficult
to see on what basis the existence of an estoppel could be alleged. At no time did the ltalian
Government say that local remedies did not have to be exhausted. N or could a waiver be implied
in the alleged fact that. « the Respondent made statements that it was willing to go to arbitration
with the United States » (5). Objections relating to nonexhaustion of local remedies have frequently
been considered on their merits in arbitration decisions over claims put forward by a
State against another State on behalf of individuals. As the arbitrai tribuna! said in the Case
Concerning the Air Services Agreement of 27 March 1946 (United States v. France), « the rule of
international law relating to the requirement of exhaustion of local remedies, when making a
distinction between the State-to-State claims in which the requirement applies, and claims
which are not subject to such a requirement, must necessarily base this distinction o n the juridical
character of the legal relationship between States which is invoked in support of the claim. Consequently,
with respect to the applicability of the local remedies rule, a distinction is generally
made between " cases of diplomatic protection >> and " cases of direct injury » (6
).
Moreover, far from being an unexpected issue, the question of exhaustion of local remedies
had been discussed at length in the Memorandum of Law submitted by the Applicant Government
in 1974 (1). It was reasonable for the same Government to take into account the fact that
the issue would have to be considered in arbitration or judicial proceedings. The Defendant
Government's constantly expressed view that the claim is unmeritorious certainly does not affect
the application of the local remedies rule. As the arbitrator noted in the Finnish Shipowners
(1) Counter-Memorial, p. 99·
(2) Reply, pp. 137-138.
(3) This passage, taken from the arbitrai award in the Ambatielos case (12 Reports of International Arbitrai
Awards, p. I 19), was quoted in the Counter-Memorial, p. 98; the Reply, p. I 37, nt. 2, refers to the pages of the award
containing the same passage.
( 4) Reply, p. I 35.
(5) Reply, p. I35· The Reply, also criticizes the Respondent for having failed to « suggest or request
that Raytheon and Machlett enter Italian courts and sue on the basis of the Treaty •· Does this imply that, according
to the Applicant, a State is under an obligation to recommend legai action against itself?
( 6) Decision of 9 December 1978, 54 International Law Reports, pp. 304 et seq. and p. 324.
(7) Unnumbered Documents submitted by ltaly, Vol. I, pp. 133-137·
214 RASSEGNA DELL'AVVOCATURA DEI.LO STATO -------------------------- -------------
case, « every relevant contention, whether it is well founded or not, brought forward by the daimant
Government in the international procedure, must under the local remedies rule have been
investigated and adjudicated upon by the highest competent municipal court ». (8)
The Applicant Government seeks support in the circumstance that « assuming for the sake
of argument that an action based on the Treaty could be brought -- the statute of limitations on
that action has now expired » (9). It is hard to see why the said circumstance should be relevant,
as it is well known that the local remedies rule fully bars an international daim when local remedies
which have not been exhausted become unavailable: the arbitration award in the Ambatielos
case (1°) provides a good example to this effect. In any case, the five-year deadline set by Artide
2947, paragraph I, of the ltalian Civil Code (11) for daims relating to damages arising out of a
wrongful act had already elapsed for any act committed in 1968 by the time the United States
Government submitted its daim on 7 February 1974 on behalf of Raytheon and Machlett (1 2
).
Therefore, any attitude that the ltalian Government may have taken after that date can in no
way be considered as the cause of the remedy not having been exhausted.
The very attempt to build an argument of estoppel on such a slender basis conveys the impression
that, even in the Applicant Government's view, there are no substantial reasons for
overcoming the objection to the admissibility of the daim. The objection rests on the fact that
Raytheon and Machlett -- apart from not taking adequate steps to prevent some of the measures
that the Applicant Government assumes to be wrongful (13) -- failed to bring an action against
the Italian State daiming compensation for damages arising from the alleged wrongful acts committed
by public authorities. The generai rule in the Italian Civil Code concerning compensation
for damages arising from wrongful acts -- Artide 2043 (14) -- is often invoked by individuals
against the Italian State and substantial sums have been awarded to the daimants where appro-
(B) Also this passage, which is taken from 3 Reports of International Arbitrai Awards, p. 1503, was quoted
in the Counter-Memorial, p. 99· The Reply, p. 137, nt. 2, again refers to the pages of the award containingthe same
passage.
(9) Reply, p. 139.
(10) See 12 Reports of International Arbitrai Awards, p. u8.
(11) Under the said paragraph the deadline is five years from the day on which the wrongful act took piace
(<< The right to compensation for damages arising from a wrongful act expires five years after the day in which the
wrongful act took piace>>).
(12) Unnumbered Documents submitted by Italy, Vol. I, p. 3·
(18) For instance, Raytheon failed to appeal to the Court of Cassation against the decision by the Court of
Palermo of 20 June 1969 concerning the terms of the fourth auction, while Machlett does not appear to have taken
any steps to challenge the bankruptcy judge's decision.
(14) << Compensationfor wrongful acts. Any act committed either wilfully or through fault which causes wrongful
damages to another person implies that the wrongdoer is under an obligation to pay compensation for those
damages » (the Italian text with full translation is reproduced in Document N. 16).
With regard to the daim for compensation of damages arising from wrongful acts, which is available under
Artide 2043 of the Italian Civil Code, it is to be pointed out that Raytheon and Machlett, if convinced that the behaviour
of Italian officers (the Mayor, the Prefect of Palermo, etc.) had been inspired by an intent of jeopardizing their
interests in favour of IRI, could have also brought a criminal action against such authorities, in compliance with
Artide 323 of the Italian Criminal Code («Innominate abuse of power») (see Document N.17). This criminal action,
if successful, would also have implied, in favour of Raytheon and Machlett, a right to compensation, under Artide
2043 of the Italian Civil Code (in the Italian legal system, damage caused by a crime gives always rise to the right
to compensation according to Artide 185 of the Criminal Code).
In other words there were two ways available to the United States shareholders for seeking compensation:
a criminal suit coupled with a civil suit or an independent civil suit, both allowing the shareholders to invoke Artide
2043 of the Civil Code.
The different opinions given in the affidavits submitted by the Applicant, except for several incorrect premises
on which they are based (e.g. on page 15 of the La Pergola's Opinion, it is taken for granted that the requisition
would have continued, which it did not; on page 16, the Prefect of Palermo is said to have made a statement conceming
the cause-and-effect relationship between requisition and bankruptcy which he never made and whose
existence has never been proved) do not consider that, when a shareholder, as has been alleged in the present case,
has suffered not only indirect damage resulting from damage inflicted to the company, but is instead the direct
victim of a persecution by public authorities which cause him an immediate, personal and direct damage, he is entitled
to compensation under Italian law.
In such a case, and irrespective of his nationality, any such shareholder can bring an action for damages against
the public official responsible for such action, as well as against the branch of the public administration on behalf
of which the latter was acting.
CONTROREPLICA DEL GOVERNO ITALIANO 215
priate. In the present case, if one assumes, as one is supposed to do under the local remedies
rule, that the Applicant Government's contentions are correct - Raytheon and Machlett suffered
damages caused by Italian public authorities in violation of the Treaty and the Supplementary
Agreement - the provisions of the Treaty and the Supplementary Agreement would
have made it necessary for an Italian court to conclude- on the basis of the same assumption
- that the Italian public authorities' acts were wrongful acts when applying Artide 2043 of
the Civil Code. (15)
No set of fact similar to that to which the United States Government's application refers
was ever invoked before an Italian court. The receiver, when he brought an action for compensation,
(16) only complained of the requisition decree. (17) N or did he invoke -or indeed could
have invoked, as he was acting on behalf of ELSI, an Italian company under Artide II, paragraph
2, of the Treaty - any provision in the Treaty or the Supplementary Agreement. Hence, the
receiver's action can in no way justify the lack of initiative on the part of Raytheon and Machlett.
In order to contend that there were no local remedies available to Raytheon and Machlett,
the Applicant Government refers to three opinions: two given to Raytheon in 1971 and the third
one, which is dated February 1988, given to the United States Government by Professar Elio
Fazzalari, who had acted over 13 years as Raytheon's counsel in relation to the claim- a fact
which is mentioned neither in the opinion annexed to the Reply nor in the Reply, but results
(15) In addition to the remedies referred to above, there were other remedies provided for by the Italian legai
system and available to the two United States companies. Such remedies are offered by the bankruptcy legislation
in favour of ali the creditors of the bankrupt company.
(a) Raytheon was in fact a chirographary creditor of ELSI for the sum of Lire I,I43,8oo,ooo (see Memoria!,
p. 6o and Annex I4), in addition to the sums guaranteeed and paid as guarantor. However, this credit was never
claimed in the bankruptcy proceedings (see Memoria!, Annex 26, p. 9 and Annex 30, p. 5) upon recommendation
of the Raytheon counsel, who was obviously well aware of how much below the triumphant forecasts the true value
of the bankrupt company's assets really was.
(b) As for the complaints about the unfavourable conditions in which the ELSI sale took piace (the absence
of any foreign companies at the auctions and the genera! complaints about « irregularities •) that the allegations are
groundless and the bankruptcy proceedings took piace in full respect of Italian law.
However, it is a genera! principle of ltalian bankruptcy legislation (Artides 23 and 26 of the Bankruptcy
Law, text reproduèed in Document N. I8) that ali the acts of bankruptcy judges can be appealed against by petition
to Courts, whose decisions can be reviewed by the Court of Cassation, according to Artide I I I of the Italian Constitution.
In fact most of the decisions of the bankruptcy judge w ere not appealed against and in any case the judicial
review of the Court of Cassation was never asked for.
(c) With regard to the specific terms of the sale, Artide Io8 of the Bankruptcy Law states that they are set
by the bankruptcy judge at the receiver's request and that the sale may be suspended when the price offered is much
lower than the market price. In the case in point it was apparently not considered necessary to use these powers
of suspension.
However, it is legally unchallengeable, and therefore an applied principle in the ltalian lega! system, that the
sale order issued by the bankruptcy judge, who thereby obviously deems it not necessary to exert the powers of suspension,
can be appealed against in a court of higher instance and, eventually, in the Court of Cassation.
The deadline for lodging an appeal is quite adequate and in any case such as to guarantee the right of defence
of the parties concerned. The deadline is represented by the order transferring the assets to the purchaser, and is
obviously subsequent to the date of the auction at which they were sold.
The appeal can be made by any of the parties interested in the correct conduct of the bankruptcy proceeding
and in obtaining the highest possible proceeds from the sale. The two parties specifically concerned are the receiver
and the bankrupt.
However, anyone, even third parties who are not involved in the proceeding but who consider that the auction
price is too low with respect to the value of the assets, can make an appeal or request the suspension of the sale,
even after the auction has been held, provided that they do so before the transfer order is issued. They are entitled
to do this irrespective of whether they are willing to malte a higher offer or whether they are reporting irregularities
in the proceeding.
In the case in point, Raytheon made only a few, unsuccessful, appeals to the lower court and never went as
far as the supreme Court of Cassation.
(16) Raytheon's counsel Giuseppe Bisconti argued in I97I that there was no cause of action under Artide 2043
of the Civil Code because « ltalian law provides for a specific remedy against the requisition which is the aforementioned
appeal to the Prefect >> (Unnumbered Documents submitted by Italy, Vol. l, p. I6o). However, the receiver
brought precisely such an action which was partly successful. The fina! decision in this case was given by the Court
of Cassation on 26 Apri! I975· For the English translation of the decision, see Memoria!, Annex 82.
(17) For an English translation of the receiver's lawsuit see Memoria!, Annex 79·
216 CONTROREPLICA DEL GOVERNO ITALIANO
from documents exhibited by the Applicant Govemment (18). The two earlier opinions did not
deal with the question of whether the Treaty could be invoked by Raytheon and Machlett before
Italian courts. The Reply's assertion (19) that Professor La Pergola<< considered in I97I whether
Raytheon could sue based on the Treaty >> is unsound, not only grammatically. Professor La
Pergola's Opinion is a discussion of diplomatic protection of shareholders. In the English translation
of this Opinion, annexed by the Applicant Government to its I974 <<Memorandum of
Lawll, the only argument given with regard to local remedies runs as follows: ((The bankruptcy
status prevents any direct initiative by the company towards reintegration or restoration in a
situation in which it would have found itself had it not been for the illicit action. On the basis
of the principles confìrmed by intemationalistic jurisprudence, this constitutes another element
permitting immediate protection of the shareholders by the State of which they are citizens.
Hence, the question of eY.hausting internai remedies does not apply since remedies, in this situation,
would not have been directly available to the shareholders. The latter have suffered
a specifìc injury of their interests since the illegal conduct of the State made the liquidation impossible
>> (2°).
On the basis of Professor Fazzalari's << independent >> Opinion, the Applicant Government ·
puts forward only one argument in order to contend that the Treaty would have been of no avail
to Raytheon and Machlett. The argument runs as follows: << Although the Treaty and Supplement
at issue here were incorporated into Italian legislative acts, the provisions argued before
this Court are not complete enough to permit a suit for compensation by a United States national
against the Government of Italy in Italian courts )) (21). In other, and perhaps simpler, words,
the United States Government's contention is that Italian courts would have ignored all the
provisions in the Treaty and the Supplementary Agreement which could have been invoked by
the two United States companies notwithstanding the existence of specifìc legislation designed
to ensure the application in Italy of the Treaty and the Supplementary Agreement (22).
The Reply does not quote, directly or indirectly, any single case in which Italian courts
would have talten the view that any provision in the Treaty or the Supplementary Agreement
is not self-executing. The Applicant Government attempts to diminish the importance of what
the Reply calls the << only Italian case cited by the Respondent in support of its argument >> (2 3).
This was a decision by the Italian Court of Cassation (24) in which Artide V, paragraph 4, of the
Treaty which had been invoked before the Italian courts by a United States corporation, was
applied to its benefìt. The Reply's comment that there ((were no damages awarded in that case>> (25)
is misleading, since no damages had been daimed; nor is the observation that the case << did not
involve the Government of Italy >> (26) any more pertinent: when a treaty provision is regarded
as self-executing in the relations between private parties, it is certainly applied also in a case
brought against public authorities.
The Italian Court of Cassation confìrmed its attitude in favour of considering the Treaty
provjsions as self-executing when it applied Artide XIV of the Treaty in a criminal case, in re
Walsh (27). In Italy, as the daimant Government rightly noted in another context(28), (([a]lthough
the opinion of the Supreme Court is not binding outside the case in which it is rendered, it is
highly persuasive authority in subsequent cases in Italian courts ll, Hence, the two decisions by
(18) See Memoria!, Annex I3 (Schedule K) and Annex 40 (Exhibit A).
(19) Reply, p. I 38.
(20) Unnumbered Documents submitted by Italy, Vol. I, p. I7Z· The English translation of the full opinion
has been omitted in Annex 3 to the Reply.
(21) Reply, p. I 38.
(22) The two legislative acts which provided the relevant « implementing orders >l (ordini di esecuzione) were
referred to in the Counter-Memorial, p. IOO).
(23) Reply, p. I 38.
(24) Decision N. zzz8 of 30 July I96o, The Durst Manufacturing Co. v. Banca Commerciale Italiana. The
text of this decision, to which the Counter-Memorial referred on p. 98, is reproduced in Document N. u.
(2 ~) Reply, p. I39·
(26) Reply, p. I 39·
(27) Decision No. Z579 of 6 December I983 - 17 February I984, Commissione Tributaria Centrale (I984),
II-II43, reproduced in Document N. IZ.
(28) Reply, p. I 39, nt. zz.
CONTROREPI.,ICA DEI, GOVERNO ITAUANO 217
the Court of Cassation mentioned above give a strong indication of what would have been the
attitude of ltalian courts if Raytheon and Machlett had brought a claim and invoked provisions
in the · Treaty an d the Supplementary · Agreement; ·
An. attitude in .. favour · of the self-executing · character of treaty provisions was shown by
the Italian Court of Cassation .also when. individuals . invoked; · in • cases. brought against public
authorìties,. provisìons.oftreatieslike GATTwhichwere taken not to be self-executing by some
non-:-Italìan coutts. For instance,. deeision N; 1455 of 21 .May 1973, Ministero delle Finanze
v.S.p,a.Manifattura. Lane Marzottq, held thatArticleU(b) of GATT << is immediately applicable,
without the need f0r futhe1: .. legi~;~Iative .intervention, not only to the participating State but
also to the subjects of the internalsystem, which gives rise. direcdy to rights and obligations >> (29).
The Reply (80) referred to a decision concerning Article 78, paragraph 4, of the Peace Treaty
with Italy, which concluded that << the said Article constitutes a relationship enforceable in internallaw
» (31). With regard to the $ame .provit!ion, in decit!ion N. 107 of 14 January 1976, Ministero
del Tesoro v. Mander Brothers Ltd., the Supreme Court stated that the said paragraph,
<< in providing that the Itaiian Government be charged with the obligation to indemnify citizens
of the United Nations for losses suffered, from wartime events, following injury or damages
caused to their property in ltaiy, gives rise, along with an international obligation of the Italian
State vis-à-vis the other Contracting States, to a direct legai relation of a binding character,
between the first State and the individuai citizens of the United Nations. Such relation, complete
in all its essential elements, is immediately effective in the domestic legai system, without the
further requirement of a normative act of integration or of implementation, and therefore, as
was pointed out by the Sezioni Unite of this Supreme Court, it is actionable by the same citizens
before Italian courts » (32). This reasoning hardly supports the Applicant Government's assertion,
with regard to the Treaty, that << although there is provision in Article V for indemnification by
the Government of Italy of those individuals or corporations who have been deprived of their
property, that Article is still not sufficiently complete » (38).
The Reply's further contention, that ((since Raytheon's and Machlett's claims are those of
shareholders, Italian law would prevent a suit seeking compensation based on the illegal requisition
because ltalian law reserves such a right to ELSI alone, despite the existence of the
Treaty » (34), is an inaccurate rendering of Professor Fazzaiari's <dndependent» Opinion to which
it refers : the final part of the Opinion, in which the argument was put forward, was written on
the basis of << [h]aving excluded that the treaty has introduced into the internallaw claims and
judicial remedies stronger an d different from those aiready available in the I talian legai system
>> (
35). Hence, this argument, whatever its merits, in no way affects the question whether
the Treaty could be invoked before Italian courts.
The Counter-Memoriai quoted a decision by the United States Court of Appeals for the
Fifth Circuit, which held that the treaties of Friendship, Commerce and Navigation <<are selfexecuting
treaties >> ( 86). The Applicant Government has in no way chailenged this appraisai of
the attitude of United States courts towards treaty provisions whose language is identica! or
similar to that of the provisions which could have been invoked before Italian courts. Nor has
(29) 96 Il Foro Italiano (1973), I-2444. English translation in 2 The Italian Yearbook of International Law
(1976), pp. 383-384. See Document N. 5·
(30) Reply, p. 138 and nt. I I.
(31) Decision N. 3592 of 13 November 1974, Ministero del Tesoro v. Di Raffaele. English translation in 2
The Italian Yearbook of International Law (1976), pp. 366-368.
( 32) 99 Il Foro Italiano (1976), I-2463. English translation in 3 The Italian Yearbook of International Law
(1977), p, 349-350. See Document No. 4·
( 83) Reply, p. 138. Under Italian law, the fact that in some instances there may be a doubt as to whether a remedy
exists before an ordinary court or an administrative court never implies that no remedy exists or that a provision
in a treaty may be taken as not being self-executing. The decision quoted at nt. 31 was in favour of the
competence of ordinary courts. No doubt, also a claim for damages under Article 2043 of the Civil Code should
be brought before an ordinary court.
(84) Reply, p. 138.
(35) Reply, Annex 2, Part. II.
(86) The reference to the decision in Spiess v. Itoh. & Company, 643 Federai Reporter, 2d Series, p. 353 et.
seq. (1981) was made in the Counter-Memorial, p. 1oo, nt. 6.
218 RASSEGNA DELL'AVVOCATURA DELLO STATO
--------------------~~~~~~~.
theApplicantGovernment given any compelling reason why Italian courts should have disregarded
these provisions. The decisions quoted above point, on the contrary, to an attitude which is
certainly not less favourable to the self-executing character of treaty provisions. Thus, Raytheon
and Machlett, in seeking immediate recourse to diplomatic protection (37), did not use the local
remedies available to them, as they were required to do under the local remedies rule. As was
said by Mr. Becker, the Agent for the United States Government in the Interhandel case:« Even
if by violation of a treaty an international wrong would have been committed, that wrong still
would not be sufficiently definite and complete so as to give rise to a claim between States. In
order to give rise to an international claim, a treaty violation must have become definite and complete;
it must have passed beyond the stage where domestic judicial action of a country can
rectify the violation (38).
(37) The request for an opinion on the admissibility of diplomatic protection {Unnumbered Documents sub.
mitted by Italy, Vol. I, p. 161) shows where their main objective was as early as 1971.
(BB) l.C.j. Pleadings, lnterhandel Case (Switzerland v. United States), p. 505.
PART IV
TRE INTERPRETATION AND APPLICATION OF TRE 1948
TREATY AND TRE 1951 SUPPLEMENTARY AGREEMENT
I. Aims pursued by the 1948 Treaty and principles on which it is based.
In Part Five of the Reply, in which the legal basis of the claim of the United States is examined,
some remarks are addressed in the first place to the question of the aims characterizing the
Treaty of Friendship, Commerce and Navigation of 2 February 1948. The Italian CounterMemorial
(l) had stressed the importance that the object and purpose of a treaty have in the
interpretation of its provisions in accordance with Artide 3 I of the Vienna Convention on the
Law of Treaties (2). The Counter-Memorial emphasized the great variety of aims pursued by
the 1948 Treaty and showed that the provisions to which the Applicant refers cannot be interpreted
solely as a function of the interests of United States investors in Italy.
In fact, as the Applicant asserts in its Reply, the Treaty provisions show that "both Parties
were concerned with the property and interests therein of each Party's corporations in the territory
of the other » (3). Rowever, for this very reason it is essential to ascertain accurately the
extent to which the above-mentioned provisions refer to the property and interests owned by
the Raytheon and Machlett corporations in Italian territory.
A further preliminary question is that of the principles on which the 1948 Treaty is based (4).
The Applicant argues that the principles of national treatment and of most favoured nation treatment
are not the only ones applied in the Treaty. (5) This is nota pertinent criticism of our reasoning
which consisted in pointing out that these are the only two principles explicitly mentioned
in the Preamble to the Treaty (6). The Applicant itself referred to an .earlier case in which the
Preamble was used by the Court to establish the object and purpose of a treaty (1). This does
not imply denying that "[t]he operative standard of treatment must be analyzed for each of the
articles advanced by the United States » (8). Rowever, one should not neglect the significance
of the phrase «in conformity with the laws and regulations in force», which qualifies the standard
of treatment provided for in several articles of the Treaty.
(l) Counter-Memorial, pp. I02-I04.
(2) The Counter-Memorial, on p. Ioi, noted that << [a]lthough the 1969 Vienna Convention on the La w of
Treaties does not apply to the interpretation of the Treaty and its Supplementary Agreement; the rules on interpretation
included in the Convention are to be considered as corresponding to those applicable under generai internationallaw
>), This appears to be common ground between the Parties, as in the Reply the « United States agrees
that the rules of the Vi enna convention apply to the interpretation of this Treaty >) (p. I 46, nt. 22).
(3) Reply, pp. I4I-142.
(4) See Counter-Memorial, pp. I04-I06.
(5) Reply, p. 142.
(6) Counter-Memorial p. 104.
(7) Reply, p. 142, nt. 4·
(B) Reply, p. 142.
220 RASSEGNA DELL'AVVOCATURA DELLO STATO
2. The ltalian nationality of ELSI.
A fundamental problem is related to the status of the ELSI company, i.e. of the entity that,
having decided to cease its activities, had its plant and equipment requisitioned and was subsequently
dedared bankrupt at the request of its management, its plant finally being sold. In this
connection it has been pointed out in the Counger-Memorial (9) that, in accordance with Artide
II, paragraph 2, of the Treaty, ELSI, having been incorporated in Italy under Italian law, is
an Italian company, notwithstanding the fact that in 1968 ali its shares were owned by the United
States companies Raytheon and Machlett. In view of its nationality, therefore, ELSI was not
eligible for protection under the 1948 Treaty and the 1951 Supplementary Agreement between
Italy and the United States with reference to its activities in Italy and the events concerning
it which occur.red in Italy. In this regard the Counter-Memorial cited the decision of the Supreme
Court of the United States in the case of Sumitomo v. Avigliano (1°). In accordance with the
Treaty of Friendship, Commerce and Navigation between the United States and Japan (in which
Artide XXII, paragraph 3, corresponds to the above-mentioned Artide II, paragraph 2, of
the Treaty between Italy and the United States), the Court ruled that since the Sumitomo company
was incorporated in New York under New York law « it is a company of the United States,
nota company of Japan », and therefore could not « invoke the rights provided in Artide VIII
paragraph 1 » of the Japan-United States Treaty.
With regard to this case the Applicant only asserts in a footnote (11) that the argument presented
by the United States before the Supreme Court in the case of Sumitomo vs. Avigliano
is not relevant to the present case since it << dealt with language particular to Artide VIII (1)
of the FCN Treaty >>. It is easy to reply, however, that the only argument of the United States
mentioned by the Italian Govemment in its Counter-Memorial (12) was drawn from the brief
submitted to the Supreme Court by the United States as Amicus CUiiae, and consisted in the
observation that, in accordance with the Treaty with J apan, « a company has the nationality of
its piace of incorporation n, This obviously results from Artide XXII paragraph 3 and not from
Artide VIII (1) of the said Treaty. Anyway, what really matters is the passage taken from the
Supreme Court's decision: the Applicant is referred to the quotation on p. 98 of the CounterMemorial
which was summerized above.
Certainly, Artide II, paragraph 2 of the 1948 Treaty represents a provision which is very
dear an d cannot be ignored. Consequently, the heart of the matter is to establish whether-given
the fact that ELSI was not eligible by nationality to invoke the Treaty with regard to Italian
authorities, any rights and interests of the two United States shareholders in ELSI, namely
Raytheon and Machlett, are « specifically protected >> by the provisions of the Treaty referred
to by the Applicant, as is asserted by the latter. On principle, it is possible that certain provisions
of an international bilatera! instrument may be intended to protect specific rights or
interests of the shareholders in a company. This was recognized by the Court in the Barcelona
Traction case. (1 3) While the Applicant cites this well-known precedent (14
), it fails to acknowledge
that the Court's decision stressed the firm distinction between the company's rights and those
of its shareholders (15). This distinction was based on the nature of corporations stock under
domestic law; which was considered to be relevant also in internationallaw insofar as the latter
makes reference to the « rules generally accepted by municipal legai system which recognized
the limited company whose capitai is represented by shares » (1 6). lnter alia the Court stated that ...
« even if a company is no more than a means for its shareholders to achieve their economie purposes,
so long as it is « in essere n, it enjoys an independent existence >> (17).
(9) Counter-Memorial, pp. 106-108.
(10) Counter-Memorial, pp. 106-107.
(11) Reply, p. 143, nt. 7·
(12) Counter-Memorial, p. 106.
(13) l.C.J. Reports 1970, p. 39, para. s8. See also p. 47, para. 90.
(14) Reply, p. 143.
(15) l.C.J. Reports 1970, p. 34, para. 41.
(16) I.C.J. Reports 1970, p. 37, para. so.
(17) J.C.J. Reports 1970, p. 36, para. 45·
CONTROREPLICA DEL GOVERNO ITALIANO 221
·In fact. this is the principle which, ·by means of provisions assigning the nationality of the
companies to the one and to the other Party to the Treaty, is considered to be a fundamental
starting point also by Treaties of Friendship, Commerce and Navigation. It is true that a smali
number of clauses ado p t instead what the Court calis « the process of lifting. the veil >l; the Court
stated that this process, <ç being an exceptional one admitted by municipal law in respect of an
institution of i:ts own makihg, is equally admissible to play a similar role in international law ll,
with the result that << on the international plane also there may in principle .be special circumstances
which justify the lifting of the veil in the interest of shareholders )) (~8). I t is dear, however,
that when cert.ain dauses specifically protect the interests of foreign shareholders in a national
company they must be interpreted restrictively and rigorously, as is in ali exceptional rules (19
).
The argument put forward by the Applicant according to which ali the provisions of the I948
Treaty and the 1951 Supplementary Agreement invoked byit are to be considered as instruments
a:ffording a wide range of protection for American shareholders. of It.alian companies does not
appear to have any legai basis.
3· T'he allege<l interference by Italy in the management and control oj ELSI. Was Article III, paragrapkz,
oj the Treaty violated?
Let us now examine each of the claims advanced by the United States Government, in the
order in which they appear in the Reply. The first wrongful act allegedly committed by the
Respondent is to have interfered in the management and contro! of the ELSI company. This
alleged act would have takenplace, according to the Applicant, first when it was decided to requisition
the plant and equipment, further when the decision by the Prefect of Palermo on the
ELSl appeal against the requisition order was delayed and, lastly, when the bankruptcy proceeding
was thwarted. Italy is thus alleged to bave violated Articles III and VII of the 1948
Treaty and Artide I of the. 1951 Supplementary Agreement.
Artide III isdividedintotwo paragraphs and there is no a1Iegation that Itaiy did not compiy
with the first of these paragraphs in the case in point. Therefore, the Appiicant has impiicitly
admitted that the Raytheon and Machlett companies enjoyed the right of holding shares in ELSI
under conditions no Iess favourabie than those granted to companies of any third country. The
Applicant implicitly recognizes also that ELSI, which was controlied by the said two United
States companies, enjoyed the right to exercise the functions for which it had been created in
conformity with the Itaiian Iaw and reguiations, upon terms no Iess favourabie than those accorcied
to corporations controlled by corporations of any third country.
The dispute concems paragraph z of Artide III which the Appiicant interpreta as permitting
t.he United States companies to organize, contro! and manage Italian commerciai and industriai
corporations subject oniy to the requirements estabiished by Italian law. This right is alleged
to have been violated by the requisition decree.
Such a contention is unfounded. First of ali, with regard to the interpretation of the relevant
section of Article III, paragraph z, it was emphasized in the Counter-Memorial (20) that
the right of United States companies to << organize, contro! and manage >> corporations and associations
in Italian territory has been granted by the Treaty ~in confQrtnity with applicable laws
and regulations)) in Italy; in other words, without prejudice to the powers granted by law to the
Italian authorities. In its Reply, the Appiicant admits that << the way in which management and
controi may be exercised is subject to the regulation under locai Iaw ll, althought it adds that
« the right to manage and contro! may not be abrogateci entirely regardiess of the treatment
accorded to It.alian nationals)) (21). Furthermore, Artide III, paragraph z, is deemed to include))
15
(1B) I.C.J. RBports 1970, p. 39, para. 58. Emphasis added.
(19) Counter-Memorial, p. xo8.
(20) Counter-Memorial, p. III.
(21) Reply, p. 145.
222 RASSEGNA DELL'AVVOCATURA DELLO STATO
« certain mmtmum standards of protection under internationallaw, including protection from
unlawful interference .with management and control » (22).
I t seems dear that the rights in questionare granted within the framework of existing Italian
legislation. In the case in point, the right to organize Italian corporations and associations
does not appear to have been taken into consideration by the Applicant. This is explained by
the fact that ELSI was already organized when the Raytheon and Machlett companies became
its shareholders. Control and management are instead concepts that refer to all those powers
which may be exercised by majority shareholders, as member of the company's Assembly,
i.e. to elect the members of other company organs, to approve the fìnanciai report, to supervise
the company management. In effect, ail these powers were exercised by Raytheon and Machlett
from the time they became majority shareholders of ELSI. And this has never been challenged
with reference to the activity carried on by these companies in the period preceding the requisition.
As to the later period, if it is admitted that management and control are protected by
the Treaty in conformity with the applicable locallaws and regulations, all the interference the
public authorities may exercise under these laws and regulations must be deemed to be compatible
with the degree of protection afforded under the Treaty. Indeed such protection cannot
be considered to be extended to the point that the United States shareholders are exonerated
from the application of imperative measures, which are binding for all subjects; some of these
measures may have an effect on the powers to manage and contro! an Italian company. In this
regard it should be noted that the Italian legai provisions on the basis of which the requisition
decree of I Aprii I968 was issued without doubt pursues public policy aims and could be characterized
as police regulations.
What must be anyway ruled out is that Artide III, paragraph 2, includes a minimum
standard of protection as established by customary internationallaw. No such standard is in
fact provided by paragraph 2. Moreover, it has been seen that generai international law gives
no protection to foreign shareholders in national companies (there is no need to make any further
reference to the Barcelona Traction case). Furthermore, the Applicant itself asserts that the standard
in question includes the « protection from unlawful interference with management and
contro! » (23), and certainly not protection from interference based on locai laws.
It remains to compare the fact which the Applicant alleges to be unlawful with the provisions
of Artide III, paragraph 2. In the Counter-Memoriai it was fìrstly noted that the requisition
decree of I Aprii I968 did no affect the shareholders' control of the ELSI company, but
only the company's control of the requisitioned assets (24). Secondly, it was pointed out that the
effect of this decree was only to temporarily suspend, and not to curtail defìnitively, the company's
contro! of the requisitioned assets (25). Thirdly, it has been emphasized that the invalidity
of the requisition decree, as ascertained by the decision of the Prefect of Palermo, does not alter
the fact that it was issued by the competent authority on a regular legai basis (26).
The Applicant contends in its Reply (27
) that only the United States companies which were
ELSI's shareholders had the right to decide upon its liquidation, and that the requisition deprived
ail potential purchasers of access to the plant, thus making it impossible to sell it as a going concero.
Furthermore, according to the Applicant, the illegitimacy of the requisition insofar as it
was not capable of achieving the purpose declared by the Mayor of Palermo would mean that
it was not in accordance with Italian law. Lastly, the alleged interference by the Itaiian Government
in the bankruptcy proceeding further diminished Raytheon and Machlett's right to receive
any of the benefìts of a normai bankruptcy sale.
These contentions appear to be largely irrelevant and in any case groundless. The unlawful
act alleged to have been committed by the Italian Government is to have prevented the
United States shareholders from managing and controlling the ELSI company. It has already
(22) Reply, p. I46.
(23) Reply, p. I46 and nt. I9.
(24) Counter-Memorial, p. In.
(26) Counter-Memorial, p. III.
(26) Counter-Memorial, p. I I I •
(27) Reply, p. I#.
CONTROREPLICA DEL GOVERNO ITALIANO 22:)
been explained that the requisition of the ELSI company was directed towards its plant and
equipi:nent, which thus became temporarily unavailable to the owner. A t the same time, the
United States shareholders continued to exercise management and control over the company.
This is shown by the fact that they allowed the Board of Directots to file a petition for bankruptcy
during the period that the requisition was in force.
There are two logical an d legai flaws in the atguments advanced by the Applicant: the
tendency to confuse the rights .of the shareholders, which are protected by the Treaty, with those
ofthe Italian eompany ELSI, and the tendency to present as e:ffects of the requisition what
were in actual fact effects of the bankruptcy. If these two flaws are reì:noved, the situation becomes
clear. In particular: it is true that the shareholders had the right to wihd up the company, but
it was the bankruptcy petition resulting from insolvency and not the temporary requisition,
which · prevented this right from being exercised. With regard to the right of access to the plant
by potential purchasers, suffice it to say that uritil 30 September 1968 this entailed obtaining the
approval of the custodians of the requisitioned assets, and after that date, ofthe Receiver in the
bankruptcy proceeding; in either case, however, they were replacing ELSI's company
officials an d not its shareholders. As to the rights of Raytheon an d Machlett companies to receive
any benefit from the bankruptcy sale, these could come into being only at the end of the bankruptcy
proceeding. They could have no possible relation with the right to manage and control
ELSI. In any case, the << interference ·>> by the Italian Government in the bankruptcy proceeding
has not been proved.
Moreover, the temporary nature of the requisition cannot be overlooked when discussing
the e:ffects of the decree by the Mayor of Palermo on the availability of the requisitioned assets.
The fact that these effects ceased on 30 September 1968 canriot be denied; it emerges from the
text of the decree and was dearly taken by the Court of Palermo as one of the factors, when calculating
the compensation to be paid to the ELSI bankruptcy Receiver. In its attempt to sup·
port its allegation that the requisition completely prevented the United States shareholders from
mana:ging and controlling ELSI, the Applicant has added to the requisition period that of the
bankruptcy, without any concern for the fact that the latter was not caused by the Italian Government;
Finally, the circumstance that the requisition in question was considered to be illegitimate
under Italian law does not produce a conflict between the said measure and the phrase << in conformity
with applicable law and regulations" contained in Artide III, paragraph 2, of the Treaty.
As stated above, this phrase is used to impose a generai restriction on the scope of the powers
of managing and controlling Italian companies attributed to United States shareholders. Although
the Prefect of Palermo ultimately quashed the Mayor decree on the ground of its inefficacy in
obtaining its stated purpose, the requisition was nevertheless the act of an authority duly empowered
to take such a measure. In any case, Artide III, paragraph 2, can certainly not be used
to assert an obligation, under internationallaw, for the Italian Government to respect the Italian
laws governing requisition; the Italian Government is only under an obligation to recognize
certain powers to foreign shareholders- in particular to manage and contro} Italian companies
-,- within the framework of Italian legislation. Moreover if it is correct that the requisition did
not affect those .. powers,, the issue of the specific relevance of the phrase «in conformity with
applicable laws and regulations >i cannot be of any use to the Applicant's assertion.
4· W as there a violation of Article VII, paragraph I· of the Treaty?
lt has already been recalled that, according to the United States Government, interference
by the Respondent in the powers of management and control of ELSI held by the two shareholding
companies allegedly violated Artide VII of the 1948 Treaty, and paragraph I of this artide
in particular. I t was pointed out in the Counter-Memorial (28) that this provision grants to the
(28) Counter-Memorial, p. uo.
224 RASSEGNA DELL'AVVOCATURA DELLO STATO
nationals, corporations and associations of each Party the right « to acquire, own and dispose
of immovable property or interests therein »in the territory of the other High Contracting Party,
under condition of reciprocity. A preliminary objection addressed to the Applicant was that
~he ELSI plant belonged to ELSI, and certainly not to its United States shareholders; the only
relevant assets possessed by the latter companies may be said to be the shares themselves.
The Applicant's Reply (29
) is based on two points. On the one hand it points out that Artide
VII. refers to « immovable property or interests therein », and asserts that the term « interest in
property » is sufficiently broad to include also the hypothesis of property owned indirectly through
a subsidiary company. Furthermore, the Applicant points out that even if Raytheon and Machlett
could claim protection oQly for their shares, one should take into account the fact that their
value was allegedly reduced to zero by the requisition.
With regard to the first point it must be remarked that the terms contained in the English
version of Artide VII, paragraph I-<< immovable property or interests therein »-corresponds
in the Italian text to the words << beni immobili o altri diritti reali », thereby referring to the
right of ownership of immovable property and to other absolute rights of a more limited extent.
This must lead anyone interpreting them to exclude completely that the term << interests » can
have in the Treaty ·the meaning attributed to it by the Applicant. The fact that ltalian law does
not recognize any « indirect >> ownership of immovable property (of which the .two United States
companies would be the ownets in the present case through an Italian subsidiary owned by
them) leads to the conclusion that if the United States actually did intend, at the time of the
1948 Treaty, to protect property in the sense indicated by the Applicant, this intention did not
emerge or prevail. This is shown by the difference observed in the two texts, which are equally
authentic according to Artide XXVII of the Treaty.
Therefore Artide VII, by guaranteeing the availability to Raytheon and Machlett of immovable
property o altri diritti reali in Italian territory, certainly protected the availability of the
ELSI shares to them but not that of the plant, of which the latter company was sole owner.
As for the allegation that the market value of ELSI shares was reduced appreciably as a result
of the. requisition, it must be pointed out that the protection afforded to the United States shareholders
under the 1948 Treaty could not be extended to the point of guaranteeing the market
value of their investments!
5· ..• or of Article I of the 1951 Supplementary Agreement?
The alleged violation by Italy of the obligation to allow the United States shareholders of
ltalian companies to exercise the management and contro! of such companies is, according to
the Applicant, an act which is incompatible also with Artide I of the Supplementary Agreement
of 26 September 1951 between the United States and ltaly.
Under the provisions of this artide the nationals, corporations and associations of each
Party << shall not be subjected to arbitrary or discriininatory rrl.easures within the territories >>
of the other Party whenever such measures would have the effect of: <<(a) preventing their effective
contro! and management of enterprises which they have been permitted to establish or
acquire therein ». A different effect is considered in section (b), but this will be discussed in
the following paragraph. By requisitioning the ELSI plant, Italy is alleged to have violated the
above-mentioned prohibition.
The first objection raised in the Counter-Memorial was that the requisition decree was
addressed to the Italian company ELSI and not to its shareholders (3°). l t was also pointed oùt
that although the requisition temporarily deprived ELSI of the availability of the requisitioned
assets (plant and equipment), it did not prevent management and contro! of the company from
continuing to be freely exercised by the statutory company organs with regard to ali aspects of
management other than those requiring on immediate need to have access to the requisitioned
(29) Reply, pp. 147-148.
(SO) Countex-Memorial, p. III.
.· .. · ..... ··.· .. · ... ··.
(~l) GQ~te~c'Memorial,. p. 1.12..
(32) Re~ly, p. 146. . .
(:13) Reply'; p; r46.
(34) Counter-Memorial, pp. na-u4.
(35) Reply, p. 147.
(36) Reply, t'; r47, . ·
(87) See Art1cle 7 of the Law N. 2.2.48 of ao March x86s, Annex E, Memorial, Annex 34·
225
226 RASSEGNA DELL'AVVOCATURA DELLO STATO
to the regional economy, substantial risk for law and order - seems to indicate that, despite
the formai irregularity of an improper use of power, the requisition decree was not the result
of any intention by the administrative authorities to harass ELSI (or its shareholders), but was
instead justified by a number of circumstances.
Last but not least, it is necessary to examine whether the measure in question can be considered
discriminatory. l t was already noted that, in the context of Treaties of Friendship, Commerce
and Navigation, which are mostly based on the principle of national treatment, a discriminatory
measure is essentially equivalent to a malicious distinction based on the nationality
of the beneficiaries. According to McKean (38): « the word discriminate alone is commonly used
in the restricted sense of an unfair, improper, unjustifiable or arbitrary distinction, and it is this
meaning that has come to be employed in international law ». The same author insists on the
« special meanÌilg » acquired by the term « discrimination » in international legai use, pointing
out that « it does not mean any distinction or differentiation, but only arbitrary, invidious or
unjustified distinctions ». In the case in point, even if one assumed that the requisition had directly
a:ffected the United States shareholders, nothing authorizes one to believe that it may
have implied the intention to apply a di:fferent and unfair treatment to the United States investors.
It is recalled here that a large number of examples of the requisitioning of plants of Italian
companies for reasons related to employment crises was mentioned in Part I of this Rejoinder.
On the other hand, the Applicant, realizing that it is impossible to assert that the requisition
was « discriminatory » in the sense defined above, asserted the existence of discrimination
in favour of the Italian company controlled by IRI, which purchased the ELSI assets at
the bankruptcy auction. However, it seems unnecessary to dwell on this flight of fancy. l t would
mean that an alleged << plot » hatched by the Italian Government, the bankruptcy proceeding
officials and the IRI group had already been arranged in view of depriving Raytheon and Machlett
of their supposed technological jewel! Such a method of presenting the facts of the case is
another dear example of the superficiality with which the Applicant has approached both the
problem of the causai connection and that related to the notion of act of the State when speaking
of the wrongful acts allegedly committed by Italy.
6. The alleged impairment by Italy of the United States companies' rights and interests.
The second act by the Italian Government deemed to have violated the obligations imposed
to it by the 1951 Supplementary Agreement with the United States consists in the alleged impairment
of the interests of the Raytheon and Machlett companies. This complaint is based on
Artide I of the Agreement, which has been examined above, with specific reference to Artide
I (b). When read together, the provisions put nationals, corporations and associations of either
High Contracting Party in a position not to be subjected to arbitrary or discriminatory measures
within the territories of the other High Contracting Party, resulting in impairing the other legally
acquired rights and interests in the enterprises « which they have been permitted to establish or
acquire herein » or in the investments which they have made, whether in the form of funds (loans,
shares or otherwise), materials, equipment, services, processes, patents, techniques or otherwise.
The measure which the Applicant asserts to be incompatible with these provisions is again
the requisition.
The main objection to this contention consists in the remark that, if the requisition measure
was neither arbitrary nor discrhninatory, as the Italian Government submits, none of the provisions
contained in the said Artide can be applied to the present case. Moreover, the Claimant
asserts that ali the rights and interests impaired by the bankruptcy fall within the scope of the
above-mentioned Artide I (b). This makes it necessary to repeat once again that the bankruptcy,
for which a petition was filed by ELSI, was not caused by the requisition. No proof whatsoever
of a causai link has been produced by the Claimant because its argument is unfounded. In fact
the bankruptcy was the result of ELSI's insolvency, which preceded the requisition. In any
( 38) The meaning of discrimination in international and municipallaw, in the British Yearbook of International
Law, 1970, p. 177 et seq.
CONTROREPLICA DEL GOVERNO ITALIANO 227
case, however, the action of the organs conducting the bankruptcy proceeding cannot be referred
to the Italian Government, and this is even more true if one considers the actions of Raytheon's
creditors! It is quite absurd that the Claimant should attempt to include within the scope of
application of Artide I (b) of the 1951 Supplementary Agreement even the financial losses suffered
by Raytheon in defending itself in the suit brought against it by the Italian banks to which
it owed money!
7· The alleged Italian taking of interests in property of Raytheon and Machlett.
According to the Claimant the third of the alleged wrongful acts by the Italian Government
consists in the " taking of interests in property >> to the detriment of the Raytheon and MachJett
companies. The provision invoked in this connection is Artide V, paragraph 2, of the 1948
Treaty, with reference to paragraph 1 of the Protocol. Under Artide V, paragraph 2, the expropriation
of property belonging to national corporations and associations of either High Contracting
Party within the territories of the other is inadmissible «without due process of law and without
the prompt payment of just and effective compensation >>. The Protocol, which bears the
same date as the Treaty, establishes in its first paragraph that << The provisions of paragraph 2
of Artide Vproviding for the payment of compensation shall extend to interests held directly
or indirectly by nationals, corporations and associations of either High Contracting Party in
property which is taken within the territories of the other High Contracting Party >>,
In the Counter-Memorial three arguments have been clarified: firstly, that the e:ffects of
the requisition of ELSI assets were quite di:fferent from those of an expropriation; secondly,
that on the basis of an interpretation which takes into account also the Italian text of the Protocol,
the provisions of Artide V, paragraph. 2, shall .extend to the rights and not to the mere
interests of United States companies in property which is taken in Italy, lastly, that the Protocol
cannot be interpreted as giving to the assets of an Italian corporation controlled by United States
shareholders the same protection as is granted to an United States corporation under Artide
V (89). The Applicant's reply to these arguments may be summarized as follows: a taking of
property is generally recognized as including not merely outright expropriation but also any
unreasonable interference with the use, enjoyment or disposal of property; the English term
« interests >> properly refl.ects the meaning of «diritti))' (and in any. case the Protocol refers to
interests held directly or indirectly by nationals, corporations and associations of either Party
in property taken within the territories of the other Party); lastly, the standard of protection
guaranteed by the Protocol is exactly the same as that provided by Artide V, paragraph 2 (
40
).
The three arguments outlined above may be further elaborateci upon. It is a known fact
that, in the decree of 1 Aprii 1968, the Mayor of Palermo provided for « the requisition with immediate
effect and for the duration of six months, unless further extended, and without prejudice
to the rights of the parties and third persons >> of the ELSI plant and equipment. The decree
referred to Artide 7 of Law N. 2248 of 20 March 1865 Annex E, as well as to Artide 69 of the
regionallaw governing local authorities (Decree N. 6 of the President of the Sicilian Region of
21 October 1955). It must be pointedout here tha.t a temporary requisition is quite different
from expropriation, while the Italian text of Artide V, paragraph 2, of the 1948 Treaty only
concerns «beni espropriati>> (expropriated property) and «esproprio dei beni>> (expropriation of
property). Furthermore, under Italian law, Artide 7 ofLaw N. 2248 of 20 March 1865, Annex
E, empowers the administrative authorities to « dispose without delay of private property in the
case of serious public necessity ))' while making no reference at all to expropriation (which is regulated
by another legislation act- Law N. 2359 of 25 June 1865). In its turn, Artide 69 of
the Decree of 21 October 1955 of the President of the Sicilian Ragion empowers mayors to take
the steps deemed necessary to cope with emergency situations, again without mentioning expropriation.
Therefore, if the characteristics of the case in point are compared with Artide V, paragraph
2, of the 1948 Treaty, taking into account the Italian text, it is dearly to be excluded
that this provision applies to the temporary requisition of the ELSI assets.
(89) Counter-Memorial, p. 109.
(40) Reply, pp. ISO-I53·
228 RASSEGNA DELL'AVVOCATURA DELLO STATO
Logically, in order to introduce a claim based on Artide V, paragraph 2, the United States
would have to assert that only the English text of the Treaty should be considered, and also that
the expression « taking of property » has actually such an extension as to include a temporary
requisition. However, the dominance of the English text is denied by the above-cited Artide
27 of the I948 Treaty, according to which the Italian and English texts are" both equally authentic
», Under Artide 33 of the Vienna Convention on the Law of Treaties this means that, except
in the case of specific mutuai agreement to the contrary, « the text is equally authoritative in each
language », However, Artide 33, paragraph 4, of the said Vienna Convention establishes that
when the comparison of identica! texts reveals a di:fference in meaning which cannot be removed
by applying Articles 3 I and 32, « the meaning which best reconciles the texts, having regard to
the object or purpose of the treaty, shall be adopted ». In the light of this principle the only way
to reconcile the English and Italian texts of Artide V, paragraph 2, of the I948 Treaty, is that
to assume that a taking of property under Artide V, paragraph 2, must be considered to occur
only when it possesses the characteristics of a definitive deprivation of property. In the Italian
text, this characteristic is indicative of expropriation and is found in the majority of cases where
a << takin gof property » in a wider sense is involved. This would lead to the exclusion from
the scope of Artide V, paragraph 2, of ali cases of any temporary requisition «in use » such as
that applied to the ELSI asserts on I Aprii 1968. ,.
However, even if one assumes that the use of the expression « taking of property » should
be accepted (which would amount to subordinating the Italian text to the English text!), a requisition
in use, which has the nature of a temporary form of Government contro! over private
property, could not be said to be equivalent in any case to a« taking of property » as set out in
the English text of Artide V, paragraph 2, of the Treaty between United States and Italy. The
vast amount of literature on the subject written in English seems to indicate that the abovementioned
forms of contro! should rather be defined as (( indirect takings·» e1) and that only the
interferences in physical property « which significantly deprive the owner of the use of his property
>> amount to a taking of that property (42). One must rule out that an interference limite d
to six months, i.e. a short suspension of the availability of the assets, could be defined as a significant
deprivai of the owner's use of property.
In conclusion, there are good reasons for sharing the view expressed by the United States
Arbitrator George Aldrich in the case ITT -Islamic Republic of Iran (43): « while the taking of contro!
over private property by a government does not automatically and immediately justify the
conclusion that the property has been taken by the government ... such a conclusion is warranted
whenever events show that the owner was deprived of fundamental property rights and it appears
that such privation is not merely ephemeral >>, In the case in point, the deprivai of the use
of the ELSI plant for the duration of six months cannot be equated to the deprivation of fundamental
property rights.
Certainly, the Mayor of Palermo was exercising a power granted to him for reasons of public
necessity in order to remedy temporarily a situation of social unrest and to prevent disorders.
In other words, he was using a regulatory power, more precisely a police power, and the exercise
of such a power can hardly be assimilateci to an expropriation measure (44).
In a study (46
) based on practice, the following conclusion was reached: « A State's declaration
that a particular interference with an alien's enjoyment of his property is justified by the
so-called « police power >> does not preclude an international tribuna! from making an independent
determination of this issue. But if the reasons given are valid and bear some plausibile re-
( 41) See Rosalyn HIGGINS, The Taking of Property by the State, in Collected Courses of The Hague Academy
of International Law, 1982 III, p. 322 et sea.
(42) Ibidem, p. 324.
(
43
) This opinio~, concurrent with that of the Tribuna!, is cited by SWANSON, Iran- U.S. Claims Tribuna!:
A Policy Analysis of the Expropriation Cases in the Western Reserve Case,Journal of International Law, 1986, p. 327.
( 44) Ibidem, p. 334·
(
46
) See CHRISTIE, What Constitutes a Taking of Property under International Law, in The British Yearbook
of lnternational Law, 1962, p. 338.
CONTROREPLICA 1)1lL GOVllRNO I'l'AUANO 229
latiònid1ip to• thè< action takent an attempt may be made to search .deep.er and see wh()ther the
State was .. activated by • some illicit motive il. · ·. ·
Even iri the• case law of the. United States'. courtS;· there. are. some precedents that arednte•
);~sting in the• prl:lsent çòritext; · • In partic:IJ;lar it is worth referririg again • to a <ial!e oonc(:lrning the
sei~ute of a c:o~l 11:\Ì~~ by or<il,'e of tlle hi~l:lest •. authorities of. the> e:x:ecutive · powe:r; P.~ee>Coal
.KC4lk~~~lr$!!~~ f{)J" 9PetatioP. of !iuchmin€1!1) ~d the• $eCl,'et~t)r .. of. Interior issued orderf'or takingpo~s~ssion
ofmiile an d tequìted. mine offidal$ to agree tri con.duct operations as agents fot the govetntfient,
thete Wa~ .a .lì talting>l of pidvl)l,te property for puhlic Ul!e · with the: meaning .of the Fifth Aritend-
. ntfliit'll!'hét ist /n ()t~n<g thi a..t .t i/: ttre) ·. hia d. •b.. ... ·e····e·····n····· ·a···· ···s· ..t..r..i...k...e....,.. ...w. •h. .i c··h· h>a>·d•· ·.s.•••t••O•• p<pe d >t•h. e.· . nor·m••··•a·•l· ··o•·p e.r at/i oti/ of a
<ila! tiìjr,ie; the jridgment stressed .the fact. that the order. was justiiied by public use·/that is to
sar) bl anlothte 'ìl\rhi~h is equiv~lent the publicpurposewhich justified the requisition decree
adopte<i ~l the Mayor of :Palet:rnQi on I A_pril 1968. . .• .> / ..• . •· .
·······•·····In:••his•••9Q11C:l!rrin,g o:pìnìori•·#t•·the•same.case;.••Judge· Reed·•.said•·that·.~r·'··•·•the;· rel~tively•.new
.tt;dmiq1,1:~•·Q.f•.~€1Il:lP<ìt~~··t~ing'··W:•.ewinll.nt••4omain··is .~·•:rnol!t•.\tl!eftd··•;tdmil;listtative•·•O:evice·:·•ma.ny
piopettieS: (•;;) i.nay be subjeçted to publie operations onty !m: a il~prt time to meetwar or ~ergency
nee(Jsr ìll}d·· c~~·th~J1·.~e··retl,lmed••to ~ei:r •• o~llerl! ·~;· .. About• the• il!sue•·()f. compensati<>J1• to.·b~· at~ri•
J:>uted.t() the own.ers, Ju<f~ ~eed, aftei:. C()nsidering tnt} \lncéft;U.nty of the me~tsUte of~maf-ket
vitltteycdncluded that: <tThe reasonable S:olution. is t'O award cofupensation·to the•owner ìls de-
.t~:r::a~~·~~:~:·~d;e~~!eo~~e::t~~~~~:::e:tgA;:;~:~;:s~;;he.United··$tates·District.
Courtin..t~e··.;vou?tgstozo''Sh~etqnd.·1fi(be0ornf?any•'li'Sawyer.(Seeretary.ofStateforCommerce)
anq o;~ersì in; \Vhìch an El:etu.tive On:ìer issued by the Ptesident ofthe• UnitedStates related to
a: diàputet)etwt;ell: a .nund>er of steel t)t'oducing companies aridtheir work force; • Thejudgment
no~d. that the dispt~te ha4: not J:>ee,n settled l:>Y :rn1;1ans of collective barg:aining; or as a result of
tb,ìi} et{orts ofthe G()yeitunent, aild that the\Yòrlters had: therèforegone·.on strike .• ···The Coul,'.t
·a1s(l Jiecalled: thereas()ilf:l!underlying tlle l>rel!ideP,tfs ;Execu~j.ve: Order, stating, ·•inter alia: .«In
arder to ensure the continued availability o~ steel it :w'as netéssary .that the Uruted States take
possession o(and operate the plantl! ». Another reason urtderlined the gravity of the situation,
in that << ••• The breakdown of collective bargaining negotiations created an immediately impendipg
.. national emergen:cy: \:)~:;c~tJ;~E; ~t~~:uption of s1;eel D:\art:l.lfacturefol,' even, a brie(period would
sedously en<langer the well-b€)1ng and safety of' the United States in a criticai situation » •. Thus,
eyenif Q.ne asl!umes Jhat the J:equish:i9n; o( the ELSl.plant.was a taking · of property, one could
not deny that i t wa$ fully jl'«!tined undet . the ci:tcumstances, .. · · ·
,S •. Discr;ep~n~y be;tzqeen:t~~Jtngijsh a:nttltdlian. texts of Article V, paragraph 2, Oj ,the itreaty.
~Biflt\1111,1i ties f!,'<iÌll wruch ~he condu$ÌOn Wa!> d,raV\fn ~ha.t Òll;lY the more resttictiye fueaning. CQt'tesp<>nding
tOthe ~taliétl.te:Xt may be taken.as.rec()nciling\x)th te:x:ts. The AppliCaritl'ul.s .. Stres$ed th,atalso
the rights indireetly held by riationals of eithér Party are protecte<i under tbe Pt'otocol ancLconsidered
that the United States shareholders in question held « indirect rights » ovet the ELÈII
(46) See supra, Part I, nt. :ao and :ax.
.._ ·-~ .r7'
230 RASSEGNA DELL'AVVOCATURA DELLO STATO
plant, which could therefore be taken by Italy only in conformity with the provisions of Artide
V, paragraph 2. However, under Italian law, the shareholders can hold rights only towards the
company and have no rights on the assets of the latter. The international significance of the
distinction between the rights of a company and the rights of its shareholders appears to be supported
by the above-cited Barcelona Traction judgment. « Indirect » rights of shareholders in
a company can only be those which will accrue at a later step, for instance, after the company
has been wound up, when the compensation initially granted to the company accrues to those
who were shareholders in it. This is related to the interpretation of paragraph I of the Protocol
as a norm essentially governing the payment of compensation for expropriated property; indeed,
reference is made in the text to the provisions of Artide V, paragraph 2, « which provide for the
payment of compensation ».
Nor can it be said that the provisions concerning the property of United States companies
in Italy, contaìned in Artide V, paragraph 2, can be extended to the United States shareholders
of the Italian companies controlled by them. This does not amount to a discussion of the level
of protection granted by the Protocol, which explicitly extends certain provisions of Artide V,
paragraph 2. It is an assertion that the owners of rights over the property taken, which are protected
by paragraph I of the Protocol, do not include the United States shareholders of controlled
Italian cotnpanies but only refer to United Sates nationals, corporations and associations
holding rights over the taken "property other than ownership (e.g. usufruct). In other words,
it is anything but certain that paragraph I of the Protocol is one of the rules intended to « lift
the corporate veil » of an Italian company to which the taken property belongs. In any case, this
is by no means explicitly provided for.
It should also be noted that no investigation of the conditions prescribed by Artide V,
paragraph 2 (« due process of law and prompt payment of just and effective compensation »)
was made in the Counter-Memorial for the simple reason that the plant requisitioned belonged
to ELSI, which, as is known, was of Italian nationality and therefore not entitled to any protection
for its property in Italy under the Treaty. Even if one assumed that they were recognized
under paragraph I of the Protocol, the only relevant rights of the United States shareholders
would concern the payment of compensation for the « expropriated » property. The advent
of the ELSI bankruptcy after the requisition also had the effect that the compensation for damages
awarded by the Court of Appeal of Palermo (in replacement of the compensation for the
requisition of the plant) was paid to the bankrucpy receiver.
9· The alleged failure by Italy to provide protection and security for ELSI.
The last of the four unlawful acts for which the Respondent was allegedly responsible has
been defined by the Applicant as « failure to provide protection and security », with reference
to Artide V, paragraph I and Artide V, paragraph 3 of the I948 Treaty. Paragraph I guarantees
the protection and security of nationals and their property of either Contracting Party in the
territories ofthe other Party. It also guarantees full protection and security as provided for under
international law (with reference to property, these guarantees are extended from the nationals
to corporations and associations). Paragraph 3 repeats the promise of protection and security
with respect to the matters enumerateci in paragraphs I and 2 '' upon compliance with the applicable
laws and regulations » under conditions of reciprocity and most favoured nation treatment.
The facts which, according to the Applicant, denote the violation of these norms by the Italian
Government ·were essentially the occupation of the plant by the work force and the Prefect's
delay in upholding the appeal made by ELSI against the requisition decree (47). But in addition
to these two circumstances, the Applicant also again raises the issue of the requisition, which
referred to « the entire entity of ELSI ». Furthermore, he complains in this respect of the failure
to protect ELSI because '' the property of Raytheon and Machlett in Italy was ELSI itself >> (48).
(47) Reply, pp. I52-I53·
(48) Reply, p. 153.
CONTROREPLICA DEL GOVERNO ITALIANO 231
In the Counter-Memorial it was already pointed out that the occupation of the ELSI plant
by the work force began prior to the requisition (49) and that the Prefect's delay in rendering his
decision on the appeal against the requisition lies totally outside the scope of Artide V, paragraphs
I and 3 (50). It was also pointed out that Raytheon and Machlett have no right to complain of
any failure to protect ELSI and the ELSI plant because ELSI was an Italian company and the
plant belonged to it (51). In its Reply, the Applicant argues that paragraphs I and 2 of Artide V
(referred to in paragraph 3) guarantee the protection and security of « persons and property »,
and not of immovable property. (52) This is correct, but is here irrelevant (also because it is obvious
that immovable property represents a category of property). What does appear relevant
and therefore must be repeated, is that, in the present case, the protection and security provided
for in Artide V, paragraphs I, 2 and 3, could only referto the property of the United States companies
Raytheon and Machlett in Italy, but that this property obviously did not include ELSI
nor the equipment and plant of this separate corporate entity.
In conclusion, the reference to Artide V, paragraphs I, 2 and 3, in the case in point does not
add any further arguments to the Applicant's defence. It may therefore be replied simply that
the protection and security of the Raytheon and Machlett companies, and of the property they
possessed in ltalian territory (i.e. money and ELSI shares) are basically extraneous to the subject
of the present dispute.
(49) Counter-Memorial, p. 86 and 109.
(50) Counter-Memorial, pp. 87-88 and 109.
(51) Counter-Memorial, p. xo8.
(52) Reply, p. xsz.

PART v
ISSUES RELATING TO THE CLAIM FOR REPARATION
I. The admissibility of the request jor reparation.
The ltalian Government's Counter-Memorial highlighted the entirely subsidiary character
of the comments expressed by the Respondent in relation to the claim for reparation advanced
by the United States Government (1).
The Applicant takés for granted, in Part VI of the Reply, the responsibility of the Italian
Government for its alleged « wrongful conduct n, and therefore asserts to be entitled to compensation
" in the full amount of the losses " resulting from that conduct (2).
On the contrary, the arguments put forward by the Respondent justify the assertion that
no violation of the I948 Treaty and of the I95I Supplementary Agreement was committed by
Italy with regard to the requisition of the ELSI plant, the bankruptcy requested by ELSI and
its finalliquidation; therefore, no reparation is due for the losses suffered by the United States
shareholders of ELSI. This explains what was defined às the subsidiary nature of the Respondent's
comments about reparation: they are made for the hypotesis that the Applicant's point
of view would be accepted by the Court.
2. Decisions handed down by the Italian Courts.
In the Italian legai system, an issue of compensation for damages resulting from the requisition
was raised by ELSI and was settled by a judgment of the Palermo Court of Appeal, dated
24 January I974, which was confirmed on a further appeal by the Court of Cassation (3). As
i t was stressed earlier, the requisition decree of the Mayor of Palermo (I Aprii I 968) was appealed
against by ELSI (on I9 Aprii I968), with result that the Prefect of Palermo, by a decision of 22
August 1969, declared the decree to be illegitimate, because it did not fit the goal pursued (4).
In this regard, it must be underlined that the requisition decree only referred to the plant
and the equipment belonging to ELSI, and not to the company as a whole. This is relevant,
because it explains that the judgment of the Court of Appeal of Palermo could not, and at all
events would not, have been permitted to make a global assessment of the state of the company
taken as a whole: in fact the claim submitted to the Court referred to a decree whose content
was clearly defined.
Furthermore, it was logical that when establishing the amount of compensation, the Court
should have worked on the basis of the value attributed to the assets by the Technical Consultant
appointed by the receiver in bankruptcy. This value amounted to 4,56o,s88,44o lire. (5).
(l) Counter-Memorial, p. ns.
(2) Reply, p. 155.
(3) Memoria!, Annexes 81 and 82.
(4) Memoria!, Annex 81, p. 22.
(5) Memoria!, Annex 81, p. 22.
234 RASSEGNA DELL'AVVOCATURA DELLO STATO
Using this value as a parameter, the Court calculated the damages occasioned to the company
over the six-month period during which the requisition decree was in force to be
II4,0I4,711. lire This was based on a rate of 5 per cent of the aforementioned value throughout
the said period, plus interest accruing from I October 1968 when the requisition had ended.
3· Unlawful conduct by the State and the obligation to make reparation for any damage.
It was recalled from the outset of this Rejoinder, that no claim for reparation could have
be advanced, unless a direct link is demonstrated to exist between the alleged wrongful act and
the alleged damage, to the effect that the former was the cause of the latter. On the contrary,
the foregoing account of the facts summarizing the dispute clearly shows that the conduct attributed
to the Italian Government does not appear to be the cause of the alleged damage. The
fìrst conclusion to be drawn is therefore that these facts or acts - mainly the requisitioning of
the ELSI plant, then the bankruptcy and the resulting liquidation - cannot be deemed to have
given rise to responsibility on the part of the Italian Government, and to its alleged obligation
to make reparation to the Government of the United States.
On this subject, there is a principle which is inherent in the generai theory of responsibility,
in domestic as well as in internationallaw: the principle of causality. To be able to impute responsibility
to a person or corporation, it is not sufficient that that person performed a specifìc
action and that a damage subsequently occurred. It is also essential to show that the action
itself actually caused that damage. This is not merely a logica! requirement, but a practical need,
which is recognized and affirmed in municipal and international judicial practice.
There are quite numerous cases in which judicial decisions have stated that the causai relationship
between a wrongful conduct and the damage is the essential condition for responsibility,
and hence for the obligation to indeinnify the injured State.
Examining the concept of causality has sometimes led the courts to see whether, in individuai
cases, the causality was adequate to justify a claim for reparation. The practice of adequate
causality is based on the following consideration: only those conditions which made the
damage probable, and hence attributable to the agent, at the very moment they carne into being,
may be considered as conditions of the damage. The adequate causality criterion is mainly applied
in complex cases, where the judge has more freedom to evaluate the facts. It seems to be
particularly appropriate for clarifying the many elements that are involved in the present case.
The Respondent certainly shares what the United States Memoria! states (6); relyirig on
the doctrine it refers to (Reuter, Yntema),: « ••• the injury for which reparation is due is that
which is tied by a chain of causality to the wrongful act ». But, this obviously implies that a
damage which is not tied by an adequate chain of causality with a wrongful act attributed to a
State cannot justify a claim for reparation against that State.
4~ Causality nexus and the measure of reparation.
About the measure of the reparation claimed for the alleged unlawful acts attributed to
Italy, the United States Reply adds nothing particularly new, and mainly re-states the arguments
set out in the Memoria!. With reference to the « duty to pay », in particular, the United States
do no more than restate generai principles, almost as if they were applicable without taking into
account the specifìc facts of the present case.
According to the Reply, it is an established principle of international law that « ••• Damages
should be awarded ... to compensate for alllosses or injury caused by a State's wrongful acts » (1);
the conclusion is drawn that « ••• [a]ll the injuries suffered by Raytheon and Machlett should be
( 6) Memoria!, p. 59·
(7) Reply, p. ISS·
CONTROREPLICA DEL GOVERNO ITALIANO 235
included in the measure of compensation >> (B). But it is an equally unchallengeable principle o(
internationallaw that an injury shall be linked in some way to an act of the State having violated
an international obligation - and the violation shall be proved as existing and attributable to
that State ~ in order to entitle · the injured State to reparation. As was stated by Anzilotti {9),
" [o]n the basis of the princìple that in order to claim compensation for an injury, the injury
must be the result of an unlawful act, it is necessary to see whether the: causality relationship
exists and the relevance of ii: in conjunction with the other causes». In any case, it is essential
to · demonstrate · that there exists a sufficiently close cause-ànd-effect relationship between the
act alleged to be at the origin of the obligation to indemnify and the injury itself.
The international judicial practice is firm in excluding the obligation to make reparation
for an injury that has not been « éprouvé avoir été une conséquence réelle et inévitable » (1°) of
the injurious act, or· when the latter act << was not in legai contemplation the proximate cause of
such a damage » (11),
To more accurately appraise the United States' claims and the specifìc aspects of this case,
it is certainly an interesting exercise to recall some of the grounds on which international courts
have ruled that a sufficient causality nexus between the alleged damage<ànd a State's unlawful
(or allegedly unlawful) act did not exist.
One of these reasons is that the act attributed to the State, while giving rise to a situation
that was favourable to the· occasion1ng of an injurious event,· cannot be·considered the ·direct
cause because the event in question or the damage would have occurred in any case, due to other
circumstances not attributable to the State.
In the Rémy Martin case (12), for example, the joint Franco-German Arbitrai Tribunal re-·
fused to award damages for the lost profìts to a French distillery as a result of an interruption
of its activities following seizure by the German authorities during the war, beeause --'"'" even
without the unlawful act of seizure - the distillery would in any case have remained inactive
as it was impossible for it to receive during the war the French grapes needed for its products.
The joint Gerrnan-Romainian Arbitrai Tribuna!, in the Carnabatu case (18) also· concluded that
the requisition of an asset cannot be considered the cause of the loss of profìts which might have
been earned from selling that asset, considering that the state of war · made the latter course of
action ìmpossible. Even more telling is the Guillemot-]acquemin case (14), in which a French
national sued for the return of two apartments in Rome which she had rented to an I talian public
corporation and had been seized during the war. The Franco-Italian Conciliation Commission
concluded that as rents in· Italy had been frozen at that time by law, even « sans le séquestre et
sans les mesures prises par le séquestrataire, Madame Guillemot-Jacquemin se trouverait,
vis-à-vis de ses deux locataires exactement dans la mème situation que celle don t elle se plaint ...
Tout lien de causalité fait clone défaut entre les restrictions que le gouvernement français voudrait
voir lever et les mesures prises par le gouvernement italien à l'égard cles deux appartements en
tant que biens ennemis » (15).
(B) Reply, p. 155·
(9) Corso di diritto internazionale, Padua, 1955, p. 431.
(10) « Proved that it had been a true and inevitable consequence ~ (unofficial translation), Affaire Yuille et
Shortridge (21 October 1861), Lapradelle et Politis, Recueil des Arbitrages internationaux, ·II, Paris, 1932, p. 78.
(ll). Mexico-U.S. Claims Commission, Armando CabosLopez Case (2 March 1926), Reportsoflnternational
Arbitral Awards, Vol. IV, p. 20. See also the arbitration decision in Responsabilité de l' Allemagne en raison des actes
commis postérieurement au 31 juillet 1914 et avant que le Portugal ne participat à la guerre (30 June 1930), Reports
of International Arbitral Awards, Vol. Il, p. 1035; and the Italy-USA Conciliation Commission, Hoffman Case,
(II Aprii 1952), Reports of International Arbitral Awards, Vol. XIV, p. 100.
(12) Recueil des Tribunaux Arbitraux Mixtes, Vol. IV, p. 415; see also the Lazare Dreyfus Case, ibidem; p. 393;
the Rousseau Case, ibidem, p. 379; and the Lazare Case, ibidem, Vol. VIII, p. 495.
(13) Recueil des Tribunaux Arbitraux Mixtes, Vol. V, p. 228; and Klotz, ibidem, Vol. II, p. 758.
(14) R,eports of International Arbitral Awards, Vol. XIII, p. 70.
(16) « Without the requisition and without the measures taken by the sequestrator, Madam Guillemot-Jacquemin
would have found herself in exactly the same situation vis-à-vis her two tenants as that of which she com-.
plaìns ..• Any casual link is therefore missing between the restrictions which the French Government would like
to see removed, and the measures taken by the Italian Government with respect to the two apartments as eriemy
property ~ ( unofficial translation).
236 RASSEGNA DELL'AVVOCATURA DELLO STATO
5. Adequate causality and the obligation to make reparation.
In certain cases, the reason why the causality link between the unlawful act of the State
and injury caused to a private person has been deemed too remote has been the fact that the
victim's own conduct (or a situation created by the victim himself) had exposed him to the influence
of the unlawful act which, without that conduct or that situation, would not ha ve caused
any injury at all. An example of this is the Dame Simone Reverand case (16
), relating to a house
that had been auctioned in Italy during the war as a result of allegedly unlawful obstacles placed
in the way of the owner, a French citizen, and preventing her from transferring to Italy the necessary
funds to pay the interest due on a mortgage on that house. Since « la situation pécuniaire
de Madame Reverand était avant le IO juin 1940 obérée à tel point que depuis mai 1939 elle
n'a vai t pu acquitter les arrérages de sa dette hypothécaire » (17), the Franco-Italian Conciliation
Commission concluded that « l'on ne peut soutenir dans ces conditions que c'est dO. au fait de la
guerre que l'intéressée s'est trouvée hors d'état de payer les arrérages en question » (18
).
There are other cases, in which the refusal to grant compensation has been determined
not only by « le lien trop lointain qui rattache la perte au fait générateur », but also << par le caractère
trop alèatoire du bénéfice espéré» (19). This happened particularly in cases where the damage
for which compensation was claimed depended on loss of an income which was wholly contingent,
even if the allegedly unlawful act on the part of the State had not been committed.
One may cite on the same line of thought, the Rudloff case, in which the umpire held that
«le cas présenté ici n'est pas celui de la perte de profits prévisibles provenant d'une affaire en
marche ou de bénéfices certains provenant d'un contrat inexécuté; c'est seulement le profit
espéré d'une affaire aventureuse injustement emp~chée dans son accomplissement par le gouvernement
défendeur. Pour cette raison, les gains escomptés par les réclamants ne peuvent pas
~tre retenus parce que ces derniers sont totalement impuissants à démontrer qu'un profit serait
résulté de l'affaire » (2°). Similarly, the umpire in the Rice case concluded that « As to the portion
of damages claimed which may be imagined to arise out of consequential damages, the umpire
desires to lay down as one of the requisites for consequential damage that there must be a manifest
wrong, the effect of which prevents the direct and habitual lawful pursuit of gain, or the
fairly certain profit of the injured person, or the profit of an enterprise judiciously planned,
according to custom and business. A mere device of speculation, however probable its success
would have been or may appear to the projector, cannot enter into the calculation of consequential
damages » (21). All these conclusions were even more concisely summed up by the umpire in the
Mora and Arago case, in the following words: « The loss is in the present case of a very speculative
character as depending upon most uncertain contingencies » (22).
In other words, with all the differences possibly resulting from the different aspects of the
cases in point, international arbitration awards confirm the need to take into account, when deciding
on the obligation to make compensation and on the amount of reparation due, not only
the link between each wrongful act attributed to the State and each injury for which reparation
is sought, but also of the influence of circumstances or acts not attributable to the respondent
State on bringing about that injury.
(16) Reports of International Arbitrai Awards, Vol. XIII, p. 276; see also the Roger Sudreaw Case, ibidem, p. 68o.
(17) « The fìnancial situation of Madam Reverand before IO June 1940 was burdened with debt to such a degree
that since May 1939 she had not been able to pay the arrears of her mortgage debt 1> (unofficial translation).
(18) (l In this situation it cannot be maintained that it is due to the war that the party concerned found herself
unable to pay the arrears in question ~ (unofficial translation).
(19) « The too distant link between the loss and the generating event 1> ••• <l by the too chancy character of the
benefit hoped for ~ (unofficial translation), LAPRADELLE et PoLITIS, op. cit. p. 284.
(20) « The case presented here is not that of a loss of the foreseeable profits of a dea! in progress or ofthe certain
benefits coming from a contract which has not been performed; it is merely the benefit which was hoped to
come from an adventurous dea!, the fulfilment of which has been unjustly prevented by the respondent Government.
For this reason the profits expected by the claimants cannot be held back as the latter are totally unable to
demonstrate that a profit would have resulted from the dea!» (unofficial translation). The Rudloff case may be
found in English in Reports of lnternational Arbitrai Awards, Vol. IX, p. 244 et seq.
(21) MooRE, History and Digest of the lnternational Arbitrations to which the United States has been a Party,
IV,. Washington 1898, p. 3248.
(22) MooRE, op. cit., IV, p. 3783.
CONTROREPLICA DEL GOVERNO ITALIANÒ 237
6. Methods for assessing the damage.. They are unsafe in the instan:t case.
The Applicant shows little concern about the existence ·of an adequate casual link between
the alleged unlawful acts which it attributes to I taly an d the damage for which reparation is claimed;
· From the part of the Reply dealing with compensation it would 'appear that i t was solely the
Mayòr'cuequisìtion decree tba,t gave rise to the alleged irtjury(28). This decree allegedly prevented
the orde:rly liquidation of ELSI; . forcing tbe company to ask · for bankruptcy, art d· thus making
Raytheon Hable for payment of ELSI's de h t$ which ha d been guaranteed by Raytheon. Because
of tbis decree, Raytheon suffered tbe loss of the loarts made to ELSI(24), as well as the charge
of all the legai and allied expenses relatirig not only to the banktuptcy proceedings an d the present
dispute, but also to tbe defen:ce of Raytbeon iti civilsuits instituted against i t by some banks.
The previòus·pages bave amply ·demoristrated·that rio evidence wbatsoevenvas given of the
chairi of causality wbìrih tbe Applìcant alleges. Furthermore, it must be recalled that this alleged
cbain <lf ca,usality seeb:ìs to be b:ìainly based on tbe inere bypotbesis tbat Raytheon would ha ve
beeri able to obtain a quite differerit firiancialresult in the event of an orderly liquidation. The
United States Government maintains that ELSI's creditors would have obtainedtòtal satisfactiòn
if this bad been pÒssible, alìdRaytbeon would bave avoided tbe aforementioned repercussions
steb:ìt:i1irig from ELSI's ruinòus state, Accòrding to tbe Applicartt, all this would have been possible
bed:tùse <ihad tbe Respoiideri:t ri:òt interfered with the liquidation, Raytheòn and Machlett
would have reeovered tbe market ~alue of ELSI as a going concem iri 1968 )) (25).
In the prevìous pages, as well as in tbe Couri:ter.;_Memoi'ial, tbe Italian Government is confident
to bave fully demonstrated that all tbe allegations put forward by the United States Government
against Italy are unfounded. We çould therefore stop here, not seeing any purpose
in commenting evaluation of datnages · which; • in the· opinion · of tbe Respondent Government,
did not exist or were not imputable to the Italian authorities' behaviour. However for the only
sake ofwboleness, tbe Italian Government will offer in the following pages some few comments
on tbe criteria used by the Applicant to evalùate the damages allegedly suffered by Raytheon
and Machlett because of ltalian wrongful acts;
The Applicant coritends that tbe whole book value of ELSI would have been realized in
tbe liquidation ptocess, the book~alue beiilg considered as the closest to its going concern value(26).
This seems hardly practicable for the purposes of valuating the injury allegedly caused to Raytheori,
because according to the priricìple accepted by international la'w judicial practice, the
onus is on the claimant for reparation to. prove that i< so i t en èonsultant le coiirs ordinaire cles
cboses; so i t en s'attacbalìt aux affaires de la parti e Iésée • ou · des dispositiòns prises par elle, il est
probable - non par seulement possible -'- que celle-ci aurait réalisé tel ou tel profit si le fait illicite
ne s'était pas produit ;; (27).
Tbe liypothesis of realiiing ELSI's entire book value thròugh liquidation must, however,
have appeared Utterly improbable 'at tbe timé, and even impossible to RaYt;heon itself, because
ELSI's own management had envisaged a quick-sale valu~ which was far lower than the book
(23) Reply, p. xss.
(2') According to the Applicant, account should also be taken, when computing the damages, of what Raytheon
would have earned as a result of the orderly liquidatiòn; In the attempt of showing that the compensation
requested is relatively modest, the Applicant stresses how their amount would at ali events be insufficient « to recoup
Raytheon's. and Machlett's investment in ELSI; since they would have lost over US $ II million in investments
made since 1956 & (Reply; P• 156)• On what conceivable basis should the Italian Goverriment be liable for
these sums?
(26) Reply, p. xs6.
(26) Reply, p. Ì57· It should be noted that in the United States Government's view, unspecifìed « actions of
the Respondent & « made it impossible for ELSI to become self-sufficiienu; therefore it would have made it itripossible
to compute « the future profìts of the company's continued operations & in the valuation of ELSI as a going
concern. , ,.
(27) « Both by taking into consideration the ordinary course of events and by ·considering the business of the
injured party of the provisions it took, it is probable- no t merely possible -, that it would have made such or suchother
profìt if the illicit event had not occurred & (unofficial translation). The quotation is drawn from the arbitrai award
in the Fabiani Case, to which the Applicant referred on several occasions in the Memorial·and the Reply.
16
238 RASSEGNA DELL'AVVOCATURA DELLO STATO
value, and insistently sought - without success - an agreement with ELSI's main creditors
based on the payment of only so % of the amounts owing to them.
The truth, as demonstrated earlier, is that the scenario of realizing ELSI as a 'going concern
' was wholly at odds with reality (28). In this connection, it is worth noting that, while the
Memoria! considered this as the most optimistic scenario, the Reply surprisingly credits it with
being the only possibility! The proof that this does not correspond to reality, despite the
contentions of the Applicant, may be found (beyond what is said in the relevant parts of the
Counter-Memorial and this Rejoinder) in the fact that in the 1974 Claim, Raytheon's own
valuation of ELSI fell very far short of the so-called ' quick-sale ' value.
Now, the United States Government contends that such valuation was the « worst case
scenario » presented « for purposes of internai corporate planning by ELSI's shareholders )) (29).
However, the United States Government now rejects what had been depicted as «a worst case
scenario» by saying that it was used in the 1974 Claim introducing negotiations «in a spirit of
compromise» (30). This statement is really hard to swallow, and one cannot neglect considering
that two different valuations - one by the bankruptcy receiver, and one by EL TEL - show
far lower figuresl
Having noted this, in passing, the onus is certainly not on the Respondent - who denies
that anything unlawful has been done and hence rejects any obligation to pay any reparation
for the alleged injury - to suggest any alternative method of valuation. As indicated already
in the Counter-Memorial (31), ltaly's remarks are offered solely as a means of showing up « the
dubious contentions of law and the distortions of facts )) in the Applicant's submissions.
7. Further arguments on refunding legai costs and computing interest.
In addition to the considerations expressed in the Counter-Memorial (32), some further
comments may be made on the issue of the legai expenses allegedly incurred by Raytheon. Despite
what the United States Government maintains, the legai costs sustained by Raytheon for
proceedings instituted in ltaly against it by ELSI creditor banks cannot, at all events, be deemed
to be « a direct consequence of the Respondent's actions )) (33). On the contrary, they were a
consequence of ELSI's insolvency.
Anyway these costs, as granted by the Italian Court must be considered as final, without
any further possibility of claims on the part of the Applicant.
The need to take account of the Applicant's delay in submitting its claim to the Court,
in order to decide whether or not the Applicant is entitled to interest on the amounts requested
by it in reparation, is confirmed by international cases. It has been affirmed in international
decisions that the failure of the allegedly creditor State to take action may affect the awarding
of interest, or at least, the determination of the date from which the in.erest is calculated as
accruing (34).
This appears to be fully justified if, in line with the prevailing doctrine, interest is considered
as a possibile element of the reparation and as such, as a lump-sum valuation of the loss of profit
(28) CLAGGETT, The Expropriation Issue before the Iran-United States Claims Tribuna[: Is 'J ust Compensation'
Required by International Law or Not?, in x6 Law and Policy in International Businnes, 1984, pp. 884-885, referred
to « ... the settled and fundamental principle that the value of an asset depends not on its cost or past usefulness,
but on its future usefulness •· He further commented: • An asset may have cost millions of dollars to produce, or
may have yielded tens of millions of dollars of profit in the past, but may have no present value if investors believe
that the asset will produce no profit in the future ».
(29) Reply, p. I 59· I t is quite irrelevant to say that the quick-sale value does not refiect the full value of ELSI
because it does not « take into account the significant intangible value of ELSI's business •, considering that according
to the Claimant, the intangible value is not even taken into account in the book value (p. xss).
( 30) Reply, p. IS9·
(31) Counter-Memorial, p. IIS.
(32) Counter-Memorial, p. I x6.
( 33) Reply, p. xs6.
(34) See the Macedonian Case, LAPRADELLE et POLITIS, op. cit., Il, pp. 203-205.
CONTROREPLICA DEL GOVERNO ITALIANO 239
stemming from the fact that the unlawfully injured party could not dispose of a sum equivalent
to the damage occasioned to it (33). From this point of view, the computation of the interest must
certainly take account of the obligation of the injured party, also sanctioned by international
case law (36), to reduce to a minimum the prejudicial consequences of the unlawful act of which
it claims to be victim.
In praticai terms, it should be noted that the decisions of international arbitration tribunals
about interests were often influenced by considerations of equity. This happened especially
in cases in which the amount involved would be far higher than the << principal » amount due in
reparation because of the long period of time with regard to which the interest would have to
be calculated (37).
Therefore, bearing in mind that international case law is virtually unanimously in refusing
to acknowledge a right to interest - let alone compound interest (38
) - the claim of the Applicant
on this point is to be considered as lacking of a sufficient justification.
(35) ANZILOTTI, Sugli effetti dell'inadempienza di obbligazioni internazionali aventi per oggetto una somma
di denaro, in Rivista di diritto internazionale, 1913, p. 54 et seq.
(36) See, for example, the Coipwer Case, LAPRADELLE et PoLITIS, op. cit. I, p. 348. And the cases cited by DERAINS,
L'obligation de minimiser le dommage dans la jurisprudence arbitrale, in Revue du Droit des Affaires
Internationales, 1987, p. 375 et seq.
(37) See the Macedonian Case and particularly the Yuille et Shortridge Case, cited above.
(38) The Iran-U.S. Claims Tribunal « has never awarded compound interest & Sylvania Technical Systems
v. Iran, cit.).
SUBMISSIONS
The Italian Government makes the following submissions:
« May it please the Courtl
To adjudge and dedare that the Application filed on 6 February 1987 by the United State
Government is inadmissible because local remedies have not been exhausted.
If no t, to adjudge an d dedare:
(r) That Artide III (2) of the Treaty of Friendship, Commerce and Navigation of 2
February 1948 has not been violated;
(2) That Artide V (r) and (3) of the Treaty has not been violated;
(3) That Artide V (2) of the Treaty has not been violated;
(4) That Artide VII of the Treaty has not been violated;
(5) That Artide I of the Supplementary Agreement of 26 September 1951 has not been
violated;
and, accordingly, to dismiss the daim ».
18 july 1988.
Professor LUIGI FERRARI BRAvo
Agent of Italy
DOCUMENTS
TABLE OF CONTENTS
r. Affidavit of Ing. Cavalli, dated 29 Aprii 1988;
2. Affidavit of Dr. Bevilacqua, dated 29 October 1987;
3· Affidavit of Avv. Maggio, dated 29 October 1987.
4· Decision N. 107 of the Court of Cassation, dated 14 Janùary 1976, Foro Italiano, 1976, I,
2463 et seq. Excerpts.
5· Decision N. 1455 of the Court of Cassation, dated 21 May 1973, Fdro!taliano, 1973, I, 2433-
2460. Excerpts.
6. Decision N. 971 of Tribunale ~ministrativo Regionale of Puglia, dated 17 December 1974.
7· Decision N. 198 of Tribunale Amministrativo Regionale of Abruzzo, dated II December
1974·
8. Affidavit of Dr. Ravalli, dated r8 December 1987.
9· Decision N. 211/75 of Tribunale Amministrativo Regionale of Lombardy, dated 16 July 1975.
ro. Decision N. 210/75 of Tribunale Amministrativo Regionale of Lombardy, dated r6 July
1975·
I I. Decision N. 2228 of the Court of Cassation, dated 30 July 1960, Rivista di diritto internazionale,
1961, pp. II7-II9·
12. Decision N. 2579 of the Court of Cassation, dated 6 December 1983-17 February 1984
Commissione tributaria centrale, 1984, II, I I43·
13. Affidavit of Dr. Cammarata, dated 26 May 1988.
14. Affidavit of Rag. Ravalico, dated 26 May 1988.
15. Decision N. 2293 of the Court of Cassation, dated 6 July 1968, Rivista di diritto internazionale,
1969, pp. 328-331.
r6. Articles 834, 835, u8r, 2043, 2447 and 2621 of the Italian Civil Code.
17. Articles 323 and 185 of the Italian Criminal Code.
18. Articles 23, 25, 26, ro8 and 218 of the Italian Bankruptcy Law, Royal Decree of 16 March
1942, N. 267.
19. Minutes of the meeting of 20 February 1968.
20. Remarks by Dr. Alessandro Alberigi Quaranta on ELTEL'S Applied Research Potential,
dated May 1971.
21. Letter to the employees of Raytheon-Elsi S.p.A., dated 16 March 1968.
22. Letter to Mr. Busacca, dated 29 March 1968.
23. Securities and Exchange Commission, Annual Report pursuant to section 13 or 15 (d) of
the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1971.
24. Securities and Exchange Commission, Annual Report pursuant to section 13 or 15 (d) of
the Securities Exchange act of 1934 for the fiscal year ended December 31, 1968.
25. Federal Reserve Bank of New York, Circular N. 6090 of January 4, 1968.
26. Speech delivered by Robert T. Scott, Vice-President, Tax-Legal, National Foreign Trade
Council in Philadelphia, Pennsylvania, on October 9, 1968, at the eighth Annual Tax Conference,
University of Philadelphia.
242 RASSEGNA DELL'AVVOCATURA DELLO STATO
27. Federai Reserve Bank of New York, Circular N. 6102 of January 25, 1968.
28. D. Lgs. 12 February 1948, N. 51 «Approvai of the New Statute of Istituto per la Ricostruzione
Industriale (IRI) "·
29. « The only answer from IRI and Finmeccanica is: Hands off GIE. Ansaldo is bitter over
its rejection ». Il Sole-24 Ore, October 3, 1987.
30. << ELSI repudiates Union Agreements. Rejects requests to withdraw dismissal notices "•
L'Ora, March 10, 1968.
31. R.D.L. N. 5 of January 23, 1933 setting up of the «Istituto per la Ricostruzione Industriale»,
with headoffice in Rome.
32. Statement by Professor Pier Giusto Jaeger, dated ]une 17, 1988.
33· Articles 41 and 42 of the ltalian Constitution.
34· Law N. 835 of October 6, 1960: « Reservation of supply and manufacturing orders for government
offices, in favour of industriai plants in the Southern regions and Lazio, and definition
of the areas to be considered included in Southern ltaly and the islands »;Artide
16 of Law N. 717 of June 26, 1965: « Regulation of actions for the development of the
South »,
35· Law N. 1589 of December 22, 1956: « lnstitution of the Ministry of State Economie Par
ticipation ».
Public sittings of the Chamber held at the Peace Palace,
President Ruda presiding
in the case concerning Elettronica Sicula S. p. A. (ELSI)
(United States of America v. Italy)
VERBAT~ RECORDS
Audiences publiques de la Chambre tenues au palais de la Paix,
sous la présidence de M. Ruda, Président
en l'affaire de l'Elettronica Sicula S. p. A. (ELSI)
(Etats-Unis d' Amérique c. Italie)
COMPTES RENDUS
244 RASSEGNA DELL'AVVOCATURA DELLO STATO
Present:
President RUDA Judges ODA, AGo, SCHWEBEL, Sir RoBERT ]ENNINGS.
Registrar Valencia-Ospina.
The Government of the United States of America is represented by :
The Honorable Mr. ABRAHAM D. SoFAER, Legai Adviser, Department of State,
Mr. MICHAEL J, MATHESON, Deputy Legai Adviser, Department of State,
as Co-Agents;
Mr. TIMOTHY E. RAMisH,
as Deputy-Agent;
Ms. MELINDA P. CHANDLER, Attorney/Adviser, Department of State,
Mr. SEAN D. MuRPHY, Attorney/Adviser, Department of State,
The Honorable Mr. RICHARD N. GARDNER, Ambassador to Italy (1977-I981);
Professor of Law and international Diplomacy, Colombia University; Counsel to the Law Firm
of Coudert Brothers,
as Counsel and Advocates ;
Mr. GIUSEPPE BISCONTI, Studio Legale Bisconti, Rome,
Mr. FRANCO BONELLI, Professor of Law, Genoa University; Partner, Studio Legale Bonelli,
Mr. ELio FAZZALARI, Professor of Civil Procedure, Rome University; Partner, Studio Legale
Fazzalari,
Mr. SHABTAI RosENNE, Member of the Israel Bar, Member of the Institute of International
Law, Honorary Member of the American Society of International Law,
as Advisers.
The Government of Italy is represented by :
Mr. LUIGI FERRARI BRAVO, Professor of International Law at the University of Rome,
Head of the Legai Service of the Ministry of Foreign Affairs,
as Agent and Counsel;
Mr. RICCARDO MoNACO, Professor Emeritus at the University of Rome,
as co-Agent and Counsel;
Mr. IGNAZIO CARAMAZZA, State Advocate, Secretary-General of the Avvocatura Generale
dello Stato,
as co-Agent and Advocate;
Mr. MICHAEL ]OACHIM BoNELL, Professor of Comparative Law at the University of Rome,
Mr. FRANCESCO CAPOTORTI, Professor of International Law at the University of Rome,
Mr. GIORGIO GAJA, Professor of International Law at the University of Florence,
Mr. KEITH HIGHET, Member of the Bars of New York and the District of Columbia,
Mr. BERARDINO LIBONATI, Professor of Commerciai Law at the University of Rome,
as Counsel and Advocates;
Assisted by :
Mr. DAVID CLARK, L.L.B. (Hons), Member of the Law Society of Scotland,
Mr. ALBERTO CoLELLA, Assistant Legai Adviser to the Ministry of Foreign Affairs,
Mr. PIER GIUSTO ]AEGER, Professor of Commerciai Law at the University of Milan,
Mr. ATTILA TANZI, Assistant Legai Adviser to the Ministry of Foreign Affairs,
Mr. ERIC WYLER, Maitre assistant of Public International Law at the Faculty of Law of
the University of Lausanne
as Advisers.
C 3/CR 89/1
Monday 13 Fehruary 1989, at 10 a. m.
. . . .. .
Ma. SoFABR- Ma. MATHESo:N- Ma • .ADAMS
.• · The· PRES:WBNT: Tbe • sitting • is · open .
.••.•. BefQre. pi()~~ecling tQ the b11silless of tbis si~ng. of the Cbamber formed to deal with the
ca.s.e con.. c etJlil1g.• . ·Elettrqnica. S.. icttlq·.·.s,p.IJ, • .( ELS·'l)· , l would like to tak.e this opportu.. ! ilÌty, ~:~.s Presi4ep.
t of the. Q<>urt tq record tl!.e sad losses su:ffered by the Court in recent months, witb the
deathli! sJ.tc<;essi;vely tì.rst of O!le Of its Members; J;DY immediate p.redece~sor as. President, secondly
of a r~~jre4. Me~;nller aJ).cifo.tmer :lill'esi4e1lt ofthe. Co.urt, and tllirdly of a • .i11dge • ah hoc sitting ·in
a•· case l:)ef(}re.·.~~, ... Charnber.of the Couri, ·.. •.. •. ·• .• .· .. ·
On 11 :Oeceiilber l988, Judge Nagendra Singh, Member. andforìner President <1fthe Court
died in The Hague, lt; has already been J;DY melanch<1ly duty to.. pay tributeto tbe memory of
Juctge Sil!).gb at.tlle public sitting of the full C!:mrt.held on 29 December 1988, and I shall not
repe~t :Wilit t $ai4 9ri that.9çca.si()n., $ince ho\Vever J udge Sillgh was also l'resident. of this Chamber,
(():1,'~~4 te;! deal :Wit4 ihe eze.tt:ronicp. Stcula Case, it WQttlc:( no.t be rigl\t tQ let the present sittirig
Jii~~ wii:h{j:u.t reca,llmg <1b,ce again IDe loss tb1:1,t w e bave suffered with his untimely demise .
..•.•... · Qri Jì Jltil.'\.u~ry )9~9.Jo.s~ t~is :Sust!I,J;Dl1l).te y 1\.ivero, f{):rtr~.er Me~;nber and. :President of
this Court, died ìti Ll:rila, Pèru. Judge Bùstamatite had been aMember ofthe Coùrt from I96I
to 197ò, and Wàs President of the Court from 1967 to 1970. Pl"ior to his election to the Court
be had had àrt exceptionally distinguished career, culminating in the Presidency of the Republic
of Peru. In the academic sphere, he had not only held chairs in legai procedure and civillaw, but
also taught philosophy, American archeology and social geography. He practised at the bar in
Peru from 1918 to 1934 and was Substitute Judge and Deputy Public Prosecutor at the Supreme
Court of Arequipa from 19:Z0 to 1934· He entered public affairs as a member of the Arequipa
City Council in 1921 and became Minister of Justice and Education in 1930; he subsequently
entered the Peruvian Foreign Service and served his country as Ambassador and as a Member
oFthe. Delegatioti to severalintetriational confèi"etices. From I94S to 1948 be \vas President
ofthe Republic of>Peru. TWelvè years latèr he was elected to the Coui"t, to which he made a
notable c<lnttibution derìving frdril his sound legai appi:"oa:dt and wide experience of public and
internationalaffairs. Elected President soon after the decision in the South West Africa Case
in xg66; which had giveri. rise tti '\l'ety sttong feelings on both sides, he was able to do much to
restore serénit;y within the Court by the quiet dignìtywith which he discharged the duties of
bis office. ·
··.·•At the end of January 1989 the.Court learnedwith regret ofthe·death, on :z7 Jatmary 1989,
of P:rofessor Michel Virally, .w ho had been appointed to si t as judge ad hoc in the Chamber formed
to deal with the. case concertiing the Land, Island · and Maritime Frontier Dispute between
El Salvador and Honduras. On(Fof the .most distinguished of bis generation of French jurists;
Judge Virally was Professorattbe University·of,Law, Economics-and··Social, Sciences in Paris
and afthe Graduate. institute of I:nternational Studies in Geneva; and Honorary Professo!' at
the Faculty of Law at • the · Uriiversity · of Geneva/ •• In addition to • an active an d· distinguished
career in the academic field, hehad also served as a member of the French delegation to various
sessìons. of tbe United Nations Generai Assembly, the Special Committee òn Principles of
Intematiomil La w concertiing Friendly Relations and Co""òperationamong States, an d the Vienna
Conference · on the La w of Treaties. The · proceedings in the case in which he had been appointed
judge ad hoc had orily reached an early stage an d his friends an d colleagues will greatly regret
that he was not to be given the opportunity of de!.llonstrating his great legai gifts in the capacity
of an. international judge.
May I invite all present to rise and observe one minute's silence in memory of the judges
whom I have mentioned.
(Ali stand).
Tbank you; please .be. seated.
246 RASSEGNA DELL'AVVOCATURA DELLO STATO
The Chamber constituted to deal with the case concerning Elettronica Sicula S.p.A. (ELSI)
sits today to hear the oral arguments of the Parties in that case.
The proceedings were instituted on 6 February I987 by an Application filed by the United
States of America alieging against Italy violations of the Treaty of Friendship, Commerce and
Navigation signed by the two States on 2 February I948 and the Supplementary Agreement
to that Treaty. The United States requested that the case should be dealt with by a Chamber
of the Court, and that proposal was agreed to by the Government of Italy. By an Order dated
2 March I987 the Court decided to accede to the request of the two Governments to form a
special Chamber of five judges to deal with the case, and dedared that at an election held that
day President Nagendra Singh, Judges Oda, Ago, Schwebel and Sir Robert Jennings had been
elected to the Chamber. Time-limits for pleadings were fixed and in due course the United
States filed a Memoria!, Italy a Counter-Memorial, the United States a Reply and Italy a Rejoinder.
Foliowing the death on I I December I988 of Judge Nagendra Singh, President of the Chamber,
the Court proceeded to fili the vacancy in the Chamber by election in accordance with Artide
I7, paragraph 3, of the Rules of Court. At that election, held on 20 December I988, my colieagues
did me the honour of electing me to fili the vacant seat in the Chamber.
In accordance with Artide 53, paragraph 2, of the Rules of Court, the Chamber, after ascertaining
the views of the parties, has decided that copies of the pleadings and documents annexed
shali be made accessible to the public with effect from the opening of the present oral proceedings.
I note the presence in Court of the agents and counsel of the two parties and dedare the
oral proceedings in the case open. I now give the ftoor to the Agent of the United States, the
Honorable Judge Abraham Sofaer.
Mr. ABRAHAM D. SoFAER:
Introduction
Mr. President, distinguished Members of the Court. It is a great honour to appear before
this Court on behalf of the United States. We greatly appreciate the Court's willingness to
constitute a chamber of judges in this dispute. The United States is pleased to be part of this
significant - and positive - development in international dispute resolution. The parties are
also particularly grateful for the President's wiliingness to serve on this Chamber on short notice,
foliowing the death of Judge Singh. Judge Singh was a prodigious and exceptional scholar, a
man of integrity and dedication. His death is a great loss to us ali.
With the permission of the President, the United States will present its case in the following
manner. I wili make a brief introductory statement describing the nature of this dispute,
the daim of the United States and the principal issues raised by the pleadings. My Co-agent,
Mr. Matheson, a Deputy Legai Adviser at the Department of State, will present to the Court
an overview of the undisputed facts and then explain certain areas where the facts are disputed.
I will then conduct the direct examination of Mr. Charles Adams, and Ms. Chandler will conduct
the examination of Mr. John Clare. Professor Bonelli will then address issues of Italian
bankruptcy law as applied to the facts of this case. Mr. Murphy will explain to the Court the
position of the United States regarding the jurisdiction of the Court and the objection of the
Respondent as to the admissibility of the claim. Professor Gardner, who served as US Ambassador
to Italy between I977 and I98I will relate the facts of this case to the violations of the
1948 Treaty of Friendship, Commerce and Navigation between the United States and Italy.
Mr. Ramish will discuss the issue of relief. Mr. Lawrence will provide expert testimony as to
the valuation of the property harmed by the Respondent in this case. Finally, Mr. Matheson
will sum up our position.
Mr. President, the case now before this Court is most important. It concerns an investment
by two companies of one country in a European country during the post-World War II
era, a time when rebuilding Europe was criticai in establishing a lasting global peace. l t concerns
~INGA SOFAER 247
measures taken against that investment by the host. country contrary to the provisions of a bilateral
treaty.
Economie development and social pr()gress ·are the common · concern of the whole international
community. By establishitig legal norms that · encotirage economie prosperity. an d the
weU,,.being of all nations, we help strengthen peacefui relations and co-operation globalty. Chapter
? of the Charter of the United Nations acknowledges that the development of economie an d
soeiai relations creates the conditions of stahility an d well-heing necessary for friendly teiations
axnong nations.
Of course, the public sector - government ~ plays a criticai role in economie development
evecywhere •. ·•· But the private sector also plays ·an important role · i11 economie· development, primarily
throtigh overseas · investment and international trade; Without a reasonable expectattion
of security, itivestors will be•less inclined tovetiture outside the favourable environments oftheir
own countries;.. Without effective legai protection; investors will be Iess inclined to risk their
capitai, and the éòst of capìtal will be proportionately greliter.
Thus, ìti pursuing this suit; the United States is not merely advancing the private interest
of one ofits natìonals. Rlither, it ìs etigagedin assuring the conditions necessary to enable citizens
and gocvernments of ail States to purstie economie deveiopment in the niost effective mamier
possible/
•·•··· · .• The • United · States and tna11Y other • tiations ha ve worked hatd to establish a .legai framewotk
for trade and investment.of capital bòth by us compallies abtoad and by foreign.companies
in the tJllited States. The corner stone ofthis legal framework has been the commerciai treaty;
While commerciai treaties have been part of US poHcy sitice the beginning of the American
Republic; they have played a major tole in this century. In the decade following the Second
World War, the United States completed the negotiation of new còrriinerciai treaties with I6
countries. Among the countries that entered into treaties ofFtiendship, Commerce and Navigatiòn
with the United States at that tim.e were the Republic Of China, Denmark, the Federai
Republic of Germany, Ireland, Japan, the Netherlands and Italy.
These new FCN treaties overhauled pre-existing commerciai treaties. They sought to
im.prove and s:trengthen the protection.ofinvestments .. Since international investment in modern
titP~8J is predominandy by· corporllte rather than. by individuai enterprise, tb.e· FCN treaties
devised ways of providing. adeqt~ately for the protection of companies, not just individuals. For
the fìrst time many of these protections extended, not only to the operations of the companies
themselves in the foreign country, but aiso to the operations of their subsidiaries ineorporated
or chartered under the laws of the foreign country. The phenomenal economie gròwth in the
world economy in the post-War era is in no smail part attributable to these types of commerciai
treaties. ·
The 194S FCN Treaty between the United States and ltaly is especially notable~ In the
aftermath ofthe war, both countries saw great sigllifìcance in normalizing bilatera! commerciai
relations. For the United States the FCN Treaty was the fìrst treaty of its kind negotiated with
any European country following the war, indeed the fìrst since 1934· It encouraged US investment
and business activities in Itaiy, by assuring certain fundamental protections in the face
of t:he extensive involvetnent of the Italian Government in the private sector that had existed
during the Second WorldWar, much of which remain.ed intact in the post~war. era and thereafter.
For Itaiy, this Treaty was one of .many steps in the resumption of Itaiy's customary position
in the family of nations. At the tìme the Treaty was concluded its proteetions were predominantly
applicable to activities of US nationais and companies in Italy. But the protections
involved are granted. with almost complete reciprocity, and ·today Italian activities within the
United States benefìt extensively from the existence of the Treaty. In fact, at the present time
Itaiian investment in the Ullited States has grown to the point that the current fl.ow .of such
investment to the United States approximates or exceeds that of the United States to Itaiy. Italy
has prospered, like many other .countries in the world, due predominantly to the ingenuity and
industry of the Itaiian people. But the FCN Treaty played its part in facilitating capitai investment
in Italy and it now serves and protects Italian entrepreneurs operating in ,the United
States.
248 RASSEGNA DELL'AVVOCATURA DELLO STATO
This case is the story of two US corporations - Raytheon Company and Machlett Laboratories
- that invested heavily in the Mezzogiorno region of Southern Italy. Their investment
began in the form of minority ownership, but then grew to IOO per cent ownership of an Italian
electronics company, located in Palermo, Sicily, named Elettronica Sicula S.p.A., commonly
referred to as '' ELSI ». Raytheon and Machlett tried to make ELSI financially self-sufficient
by investing large amounts of capitai and expertise, but ELSI unfortunately never became financially
self-sufficient. Raytheon and Machlett tried to persuade the Respondent to help by
becoming a partner in ELSI, and by enforcing Italian laws favouring investments in Southern
ltaly. The Respondent refused to do so.
In March I968, Raytheon and Machlett reluctantly decided to put ELSI through an orderly
liquidation process, whereby- either as a whole or by individuai product lines- ELSI's plant
and assets would be sold off, thus minimizing Raytheon's and Machlett's loss in their investment.
As owners, these US companies had the right to end their business in the manner they believed
was best suited to obtain the highest possible return on their investment. Mter careful study,
they concluded that the best return would be obtained from an orderly liquidation.
The .Respondent, however, refused to allow Raytheon and Machlett to accomplish this orderly
liquidation. On I Aprii I968, the Respondent requisitioned the plant and assets of ELSI
for an extendable six-month period, apparently fearing the politica! and economie effect of a
liquidation. This act prevented Raytheon and Machlett from exercising a fundamental right
under the FCN Treaty, that of protecting their capitai through the sale of their property interests.
Moreover, the requisition placed ELSI in a position of not being able to pay its bills as
they carne due, unless substantial further investments were made by Raytheon and Machlett.
Raytheon and Machlett urged administrative officials to rescind the requisiton. On I9 Aprii
Ig68, however, President Carollo of Sicily announced that the requisition would be maintained
indefinitely unless Raytheon abandoned its liquidation pian. He could not have been clearer
in stating his aim of damaging ELSI unless Raytheon subtnitted to his demand that operations
continue and the liquidation be abandoned. Pres' dente Carollo stated:
" Nobody in Italy shall purchase, that is to say IRI shall not purchase neither fora low nor
for a high price, the Region shall not purchase, private enterprise shall not purchase. Let me
add that the Region and IRI and anybody else who has any possibility to influence the market
will refuse in the most absolute manner to favour any sale while the plant is closed ».
The Respondent is clearly responsible for the actions of its officials, which led to the consequences
President Carollo explicitly predicted.
ELSI appealed the Mayor's order to the Mayor's administrative superior, the Prefect.
But the Prefect failed to act. Meanwhile, no steps were taken by the authorities in contro! of
ELSI's plant and assets to continue ELSI's operations. ELSI's assets and work-in-progress
immediately began to deteriorate in value. With debts coming due and no prospect of regaining
custody of ELSI's plant and assets, ELSI's ltalian counsel advised ELSI's Board of Directors
that it should file a petition in bankruptcy. A petition in bankruptcy was filed, and on 7 May
Ig68 ELSI was declared bankrupt.
Four auctions were held during the bankruptcy, but no bidders appeared, just as President
Carollo had threatened. The Respondent in this case claims that this fact establishes that ELSI
had no value. But this claim ili befits the very authorities that precluded Raytheon and Machlett
from implementing its planned liquidation and thereafter effectively prevented any meaningful
bids to be made. As the evidence shows, before the first notice of auction in bankruptcy,
on I I December Ig68, ltaly had taken severa! steps to signal its determination to take over ELSI,
at a price of its own choosing. On 25 July Ig68 the Italian Minister of Industry, Commerce,
and Crafts indicated in Parliament that the Government of ltaly would take over ELSI's plant.
On 3 November I968 the Respondent issued a press release that IRI-STET would take over
ELSI. On 30 November Ig68 a " STET >> sign was placed over the ELSI plant entrance. During
December I968, IRI formed EL TEL for the express purpose of taking over ELSI.
While ELSI officials received enquiries · from prospective purchasers of its product lines
and other assets, they could do none of the normal things that a seller does to bring about sales
ARRINGA SOFAER 249
since they lacked contro} of the vecy assets being sol d. An d when. noti ce of sale in bankruptcy
was issued, the notice called simp}y for the sale of ali of ELSI's assets, a commercially untenable
proposition for any possible purchaser other than ]RI, and completely at variance with the
method of sale which ELSI and Raytheon offi.cials had planned.
Given these preliminary arrangements, IRI's subsidiary ELTEL was able to take its time
in deciding when to purchase ELSI. l t allowed three auctions to go by, with the price dropping
after. each ended without a bid. Then, in the fourth auction, EL TEL bought ELSI's assets
at a far lower price than could.have been obtained through an orderly liquidation.
When this deed had been done, and some r6 months after ELSI had appealed the requisition
order, the Prefect found that the requisìtion was after ali illegal. Even then the Respondent
refused to pay for the damages i t had caused. Instead, i t paid an amount described by the Italian
courts as the rental value of ELSI's plant for a six-month. period.
W e- believe that a review of the evidence reveals that this is a simple case. The relevant
facts and the controlling· law are straightforward,- and largely undisputed. Differences do exist
between the parties, however, about a few material issues of fact and concerning some aspects
of the governing law. In accordance with Artide 6o of the Rules of this Court, our oral presentation
will be directed primarily to the issues that stili divide the parties, and we will not repeat
the facts and arguments · contained in the written · pleadings. Hence, the fact that we do
not address some of the Respondent's argurnents should not be construed as implying a waiver
of our position as stated in our · written pleadìngs.
The Resporiderit raises an objection that the United States claim is inadmissibl~, due to
a failure by Raytheon and Machlett to exhaust local remedies. In its pleadings the Respondent
devotes considérable · attention to provirig the existence of the local remedies rule, but fails to
sustain its burden of showing that · the rule applies in this case an d that remedies exist which
were not eXhausted.
The claim in this case, which is based on violations of a treaty between two governments
should not be found inadmissible; • The rights of the United States under this treaty should be
vindicated by the declaration of this Court that the treaty was violated and that reparation is
due. Indeed, Artide XXVI of the'FCN Treaty states that where disputes cannot be satisfactorily
adjusted by diploniacy, either party may submit the dispute to this Court for interpreation or
application.
Even if the local renìedies · rule is applièable to this dispute, the rule is satisfied. Raytheon
and Machlett pursued ali reasonable methods of overturning the requisition and mitigating the
damage caused d,uring th~ bankrup,tcy proce$s. The Italian courts•were provided several opportunities
to order the Respondent to pay compensation for its acts once the requisition had been
declared illegal by the Prefect.
Left with no further remedy under Italian law, Raytheon and Machlett turned to the United
States Government. When the United States presented a claim to the Respondent in 1974 we
asserted that ali local remedies had been exhausted and that the Respondent had violated its
international obligations to the United States. The Respondent answered this diplomatic _note
four years later. In its response, as well as in subsequent diplomatic communications, the Respondent
argued that no violation of internati.onal law Qr Italian law had occurred, but it never
claimed unti! this a.ction was commenced that Qther remedies existed and should be pursued in
I,talian courts. The Respondent should be precluded at this point, on this record, from asserting
that such remedies existed and should bave been pursued.
The governing law makes clear, moreover, that the Respondent denied to Raytheon and
Machlett severa} rights to which they were entitled un der the FCN Treaty. · These rights ha ve
been carefully ideBtified.in our written p}eadings and include: the right to manage and control
ELSI; the right not to have their legally acquired investment interests in ELSI impaired by the
Respondent; the right to receive from the Respondent protection an d security for their property;
an d the right · to prompt payment of just and effective compensation for the wrongful taking by
the Respondent of interests in property.
The breach of these. international obligations by the Respondent creates a duty to make
reparations to the United States. Reparation in this case should be measured by the injury
250 RASSEGNA DELL'AVVOCATURA DELLO STATO
actually incurred by Raytheon and Machlett. Since ELSI never became financially self-sufficient,
we do not seek reparation in the form of lost future profits of Raytheon and Machlett.
Rather, we have assessed the value of ELSI at the time of the requisition, essentially according
to its adjusted book value, taking into account certain intangible values as well. On this basis,
the United States seeks reparation for injuries suffered by Raytheon and Machlett with respect
to loan guarantee payments, return of investment, open accounts, and legai expenses and costs.
T o aid the Court in the assessment of these damages the United States will present an accounting
expert to analyse the available documentation and to present the methodology relied on in our
computations.
The total amount of damages suffered by Raytheon and Machlett, which is claimed by the
United States, is US$ 12,679,000. The Court is requested to order payment to the United States
in this amount. In addition, the United States requests that the Court award interest on
this amount, at the average annua! rate of the United States prime rate, compounded annually
from the date of the injury to the date compensation is paid. For purposes of simplification, the
United States has in its annexes calculated interest from the end of the calendar year in which
the injury occurred.
In conclusion, I would mention that a sound resolution of the questions in this case is no
more important to the nationals of the United States than i t is to the nationals of the many nat10ns
now engaged in international investment under the protection of FCN treaties or similar agreements.
Investment outlays in the United States by foreign beneficiai owners have recently reached
about us $ 40 billion per year. Companies from countries in Europe, the Middle East, and Asia are
investing heavily in the United States, often under the protection of FCN or similar agreements.
It is essential that nothing be clone to imperil the stability and integrity of the legai régime in
which ali these international investments are made. In short, we are here, your Honours, to
protect not only a US company and US interests, but the interests of ali investors who rely upon
FCN treaties and similar agreements for protection.
This finishes my opening remarks. Following what I understand is the practice in this
Court, during the course of our oral statements we shall not read ali our detailed references and
citations. These references and citations will be given to the Registry and I ask that they be
included in the transcript of these proceedings in full. I trust that this will meet with the approvai
of the Court and will not cause any inconvenience to the Respondent.
I now request that the President invite Mr. Matheson to address in more detail the facts
of this case.
The PRESIDENT: Thank you Judge Sofaer. I cali the Co-Agent of the United States, Mr.
Michael Matheson.
Mr. MATHESON:
Facts
Thank you Mr. President, distinguished Members of the Court. It is my honour to present
to you today the argument of the United States on the facts of the case which is before you.
Although it may not be apparent from the Respondent's written pleadings, the vast majority
of the facts relevant to this case are not in dispute. In a number of instances where the Respondent
does dispute a particular fact asserted by the United States, it has yet to present documentary
evidence of its position. Finally, there exist a few categories of factual evidence whìch the
Respondent has placed on the record but which are irrelevant to the basic dispute before the
Court.
I will not attempt to repeat the materia! that appears in our written pleadings. Rather, I will
begin by summarizing the more important facts which in our view are not disputed. I will then
deal briefly with certain facts asserted by the Respondent which are essentially irrelevant to this
case. Finally, I will explore in greater detail the two important questions of fact which are disputed.
ARRINGA MATHESON 251
Undisputedfacts.
To begin with, we believe that it would be useful for the Court to have before it as çonplete
an indication as possible as to which facts. are not disputed. I will therefore present a brief summatj
of the more important facts which we believe to be in this category. If the Respondent
disagrees .. with .any of these facts we invite the ~espondent to specify them and identify any
documents before the Couit which support i t~. position.
· · First, there is. no dispute with respect to the nationality of each of the parties that play a
part in this proce~ding. · Raytheon Company · (known as « Raytheon »), Machlett Laboratories,
Incorporated · {kn0wn as • « Machlett »), an d Raytheon Europe International Company (known
as « Raytheon · Europe ») are an· U nited States natiorials. Raytheon Europe is· the European management
subsidiary. of Raytheon and is wholly owned by Raytheon. Elettronica Sicula S.p.A.
(E/..Sl) (còmmonly known as << ELSI »), and Istituto per la Ricostruzione Industriale (IRI)
(often known as « IRI »)are halian nationals. ELSI was organized in May I954 and was wholly
owned by Raytheon and Machlett; IRI is a holding company owned by the Government of
Italy.
· The second area of undisputed fact lies in ELSI's financial performance. It is undisputed
that althol)gh Raytheon. aJ:ld. ;Machlett provided financial, managerial, an d technical support for
ELSI, EtSI neverbecanu~ financially self-sufficient. As of JI March I968, ELSI's accumulated
Iosses werè at least 8.5 billion lire (t1S$ IJ,68o,ooo).
Itis further Ut1disp\lted that ELSI's shareholders decided to liquidate ELSI's .assets by
means of an orderly liquidation un.der Italian law. During March 1968, in accordance with its
decision, ELSI ceased full-scale production, dismissed employees except for approximately IJO
needed for wind-up operations, and took · steps to commence an orderly liquidation of assets.
·.· lt is undisputed that the Respondent prevented the implementation of this plan by its requisii:
ion of ELSI's assets. On I Aprii I968 the Mayor of Palermo, acting on behalf of the national
government, issued an order, effective immediately, requisitioning ELSI's plant and related
tangible assèts for « the duration of six months, except as may be necessary to extend such
period ,,,
It is undisputed that the requisition was found to be illegal under Italian law. lmmediately
following the requisition, ELSI represen.tatives sent cables to the Mayol,' and other Italian authorities
asking them to revoke the requisition, but received no response. On about II Aprii I968,
ELSI again petitionedthe Mawrof Palermo to lift the requisition order; the Mayor never responded.
On I9 Aprii Ig68, ELSl filed a formai appeal of the requisition order to the Prefect
ofl?alermo. The Prèfect ruled on 22 At1gust I969 that the requisition was illegal. The ruling
was issued approximately x6 months after the requisition order - but only a short period after
ELSI's assets had been purchased in banki.vptcy by the Respondent.
. . It is undisputed that: officials of the Italian Government made a series of statements, beginning
before the requisition, that evidenced its intention to prevent the orderly liquidation
an d. to take over EL SI for itself. I will give you a few examples of these statements. O n 3 x
March I968, the President ofthe Sicilian Regiori told ELSI's Managing Director that the Italian
Prime. Minister had said that the Governmen.t of ltaly would requisition ELSI's plant in order
to preverit the liquidation. On 20 Aprii 1968, following a meeting with Raytheon officials in
which he advocated additional investment in and continued operation of ELSI, the President
of the Sicilian Region delivered a memorandum to Raytheon stating that liquidation was impossible
for the time being. That memorandum stated that:
« nobody in Italy shall purchase [ELSI] neither for a low nor for a high price, the Region
shall not purchase, private enterprises shall not purchase ... [T]he region and IRI and
anybody else who has any possibility to influence the market will refuse in the most
absolute manner to favor any sale while the plant is closed ».
On 25 July I968, the Minister of Industry, Commerce and Crafts announced the intention
of the Government of Italy to take over ELSI's plant through one of IRI's subsidiaries. On
IJ November I968, the Italian Government announced that an IRI subsidiary, known as IRI252
RASSEGNA DELL'AVVOCATURA DELLO STATO
STET, would take over ELSI's plant. In December 1968, IRI formed a new subsidiaryIndustria
Elettronica Telecomunicazioni, S.p.A. (commonly known as «EL TEL ))) - to take
over ELSI's plant and assets.
It is undisputed that ELSI's bankruptcy petition was filed on 26 Aprii !968 and that ELSI
was declared bankrupt on 7 May 1968. Most of the ensuing events in the bankruptcy process
are also undisputed. Although I will not belabour the Court with a long diversion into the intricacies
of the bankruptcy process, it is important to note a few key events. Despite the Respondent's
announced intention to take over ELSI, neither IRI nor EL TEL attended the first
three bankruptcy auctions. ELTEL acquired ELSI's assets in another manner.
A week after the second auction, EL TEL proposed to the Trustee that it be allowed to lease
and reopen the ELSI plant for an eighteen-month period at an annual rental charge of ISO
million lire (US$24o,ooo). The creditors committee, which included Raytheon Europe, opposed
the proposed lease, but it was approved by the bankruptcy judge on the terms requested.
Raytheon Europe's appeal of the lease to the Civil and Criminal Tribuna! was denied. In fact,
the lease lasted less than four months, since EL TEL acquired ELSI outright in July I969.
The total amount in rent collected by the b!lnkruptcy judge was only 48 million lire (US$77,ooo).
(Memorial, Annex 30, Attachment B of Schedule A.).
In Aprilx969 EL TEL notified the bankruptcy court that it was willing to purchase ELSI's
plant and equipment, with the exception of certain supplies that were not essential for the administration
of the plant. EL TEL indicated that it would bid at the third auction if it could bid
3.205 billion lire (US$5,I28,ooo) for the plant and equipment only. The bankruptcy judge did
not alter the terms of the third auction and EL TEL did not bid.
In May 1969 EL TEL offered to purchase the plant, equipment and inventory for 4 billion
lire (US$6,4oo,ooo). On 9 June the bankruptcy judge ordered a fourth auction and set a base
price of 4 billion lire (US$6,4oo,ooo). Raytheon Europe appealed this decision, but that appeal
was denied.
On 12 July 1969 the fourth auction was held; only ELTEL attended. ELTEL purchased
ELSI's plant and remaining assets for 4.oo6 billion lire (US $6,409,6oo). On 13 July the Civil
and Criminal Tribunal of Palermo approved the purchase and assigned ELSI's remaining assets
to ELTEL.
I t is undisputed that the Trustee in bankruptcy was granted only I I4 million lire (US
$ I71,ooo) in damages for the illegal requisition. On 22 November 1969 the Trustee brought
suit in the Court of Palermo on behalf of ELSI's bankrupt estate against the Minister of the
Interior of Italy and the Mayor of Palermo for damages resulting from the requisition. The
Trustee sought damages of 2.395 billion lire (US$3,834,500) plus interest for the difference
between the book value of ELSI's fixed assets [plantand electronic equipment] on the date of
the bankruptcy and the evaluation made by a court-appointed appraiser at the end of the requisition
period on II October I968, and also requested the same for ELSI's inability to dispose
of the plant and equipment during the requisition period. The Court of Palermo denied the
Trustee's request. Memorial, Annex 79· The Court of Appeals reversed this decision and awarded
damages to the Trustee, but it limited those darnages to the rental value of ELSI for the
six-month period in the amount of II4 million lire (US$171,ooo). Memorial, Annex 8x.
l t is undisputed that, after the sale of the rernaining materials and collection of receivables,
a total of only 6.374 billion lire (910,192,ooo) was realized from the sale of ELSI's assets in bankruptcy.
Memorial, Annex 30, Attachment B of Schedule A. Because the proceeds from the sales
in bankruptcy were insufficient to pay ali of ELSI's obligations, Raytheon lost the full value of
the open accounts and was required to pay all the guaranteed loans, at a total cost to Raytheon
of more than 6.931 billion lire (US$ II,II3,6oo).
Finally, it is undisputed that the United States made extensive efforts to recover compensation
for the Respondent's actions through diplomatic channels. On 7 February I974 the
United States sent a diplomatic note to the Respondent seeking compensation for its actions
against Raytheon and Machlett's subsidiary. The Respondent replied on I3 June 1978 that the
claim was groundless. On 18 Aprii 1979 the United States sent another diplomatic note questioning
the basis for the Respondent's position. The Respondent senta letter to the United
4MING.A MATW!SQN 253
States on 18 Ap:t:il X98.o tepeating that it was jutidicìdly ùnpossible for the Respondent to pay
compensation for the claim. Finally in November 1985 the pa.tties agreed that the United States
should file applicationwith this. Court to initiate .proceedings in this case.
This. concludes my review of the most important undisputed facts. As I .stated a t the outset,
if the Resp9ndent takes the position that. any of these facts ìs disputed, the Respondent should
indicatewhicll, spec~fì.c fact i t disag"tees with; and should refer to the documentary evi dence before
the Court. whichsuppQ:rts .. its position. This.ptocess will narrow the dispute and assist the parties
and 1:he Court .in focusing on the :real issues itt this cas.e.
lr:r~le'l)ant.facts.
/ . I 'l'Vili ne:x:t deal brieily with the considerable amount of factual.material in the Respondent's
w:dt1;eri pleaAiJ.lgs that is ess!mti~lly irre!evant to this case. The.Respondent places great weight
i>i:i ELSI's àsserted unprofitability ai:id the reasons for this situation. The state of ELSI's profìtlll:>
ility is not disputedin this (lase, nor is it relevant to this proceeding, Regardless of the state
0(:J:!;LSI's profìtllpilityi the Resp0ndei:itwrongfully prevented ELSI's shareholders and creditors
ftom. :realiz~ng t}le ftì,ll vlllue <lf thf:! cor,npany througl:l the ordeJ;ly liquidation of its assets.
•..• No~; ~e the :reasoi:is fot ELSl''s financial performance relevant. ELSI's geographic location,
the ;ati; ot ELSl'$ product lines, anci similar t:naterial to which Respondent refers, are all essentill,
lly ittelevant tq . the l:>ll~ic issl1e l:>ef()J:e. ~Pi&. 9o.urt: . whetber the .•. illegal requisition and other
acts ,ai:id gm.issions by the · :Respondenf constitute •. a violation of the .· FCN Treaty. While the
(fi:iited Stàtes has provi4ed complete responses to Respolldent's allegations in this regard -
beca.use ii:i ouryiew t]le :Responc1ent is wrong ~ the Court .simply need not reach these issues.
W}l3tever the reasoil for ELSI's financial performal}ce Raytheon and Machlett were wrongfully
deprived of the rjght tò •• liquidateELSI'sassetsinan orderly fashion. .
N oiJ.etlJ,eless,. ~o. giye th,e Court an accurate pictu,re of these matters, I would like to review
very briefly the evei:its which led up to the planned liquidation of ELSI.
BeginQing in 1967, when Ra}'theqn decided that ELSI. had to be made financially self-sufficient,
th,éy repeateclly met '\VÌth Italian Government oflicials an d o:fféred a number of proposals
to.~voidJlie necessity.of.!t liquidatioll of ELSt .••• · These proposals are outlined in our pleadh~gs
(Memoria!, p. 8; Reply, pp. 128-129) in some detail. The J?roposals had several common ele~
ments: ELSI's shareholders would upgtade ELSl's plant andproduction systems and improve
managerial techniques; new products an d markets would be developed in order to expand and
diversify ELSI's business and make full use of its operating capacity; an influential Italian partner
would be found for ELSI; and the co-operation of the Italian Government would be secur~d.
Beginning in Aprii 1967 Raytheon provided 4 billion lire (Memoria!, Annex xs, para. ::n) to ELSI
in recapitalization and guaranteed credit which it believed would be sufficient to continue ELSI's
operations. for another 12 months. By December 1967 much of ELSl's facilities and operations
had been upgraded. Improved quality, production and scta:p eonttol systètns were implemented.
A worker training programme was established. Production facilities were restructured .
. Raytheon also identified severlll new product lines into which ELSl could expand. This
included the government-dominated telecommunications products - including telephone . switching
equipment - whìch are the very products that ate now being ri:iade by the governtnentowned
company that acquired · ELSI's assets in· bankruptcy.
However, Raytheon was not successful in finding an infiuential Italian partner that could
assist ELSI in competing in Italian markets. An itnpottant govemment-backed Italian partner
would have opened up new markets and access to the Italian business network and would have
assured a rightful piace in the future of the ltalian electronics industry which was doìninated by
government-backed companies.
One possibility ELSI and its stockholders explored was partnership with IRI, which had
extensive commerciai and banking interests and which dominated the telecommunications.,
electronics and engineering industries and markets in Italy. In fact, RaYtheon had already successfully
entered into just such a partnership with IRI and the private company FIA T in an
electronics company on the Italian mainland. Raytheon also explored a relationship with ESPI,
17
254 RASSEGNA DELL'AVVOCATURA DELLO STATO
the Sicilian governmental entity responsible for finding and promoting Sicilian development.
But neither of these ltalian entities were interested.
Likewise, Raytheon was unable to secure the support of the Italian Government. The
Italian Government was a dominant customer, and through IRI a dominant supplier, in the
Italian electronics industries including the telecommunications industry. It was also dominant
in related support industries, such as the transportation system and the Italian banking system.
With government support - and with IRI as an Italian partner - Raytheon and Machlett also
hoped to secure for ELSI the transportation and procurement benefits for investors in the Mezzogiorno
region that had been much publicized but never realized by ELSI.
For nearly a year, between February 1967 and March 1968, Mr. Adams, Mr. Clare, and
several senior Raytheon officials held some 70 meetings with cabinet-level officials of the national
government, with officials of the Sicilian Region, and with representatives of IRI. They presented
them with a centrai plan and with numerous specific proposals for Italian Government participation.
These proposals are fully described in the United States Memoria! (Memoria!, Annex
22).
However, neither the Italian Government nor IRI accepted any of these proposals to invest
in or establish a commerciai relationship with ELSI. Mr. Adams and Mr. Clare expressly told
Italian governmental and industriai officials that unless ELSI acquired an infl.uential Italian
partner and support from the Italian Government, the stockholders could not justify contributions
of additional capitai to ELSI, and ELSI would have to cease operations early in 1968.
By February 1968, the 4·5 million dollar recapitalization (Memoria!, Annex 13, Schedule A)
that Raytheon had contributed to ELSI in 1967 was running out. When neither an Italian partner
nor I talian Government support had materialized, Raytheon and Machlett decided in
March 1968 to place ELSI in voluntary liquidation at the highest possible price to obviate the
need to make substantial further capitai contributions to ELSI and to minimize their losses.
On 16 March 1968, ELSI's Board of Directors voted to cease full-scale production and to liquidate
ELSI. On 18 March, ELSI's shareholders, Raytheon and Machlett, voted to affirm
this decision.
The national government, the regional government, IRI and ESPI were all extended every
opportunity to keep ELSI alive and to keep the workers employed through normal and lawful
means. The Respondent chose, however, not to pursue these opportunities and chose instead
to take the extreme step of requisitioning the company in an unlawful manner and acquiring
ELSI for itself under the distress conditions of a bankruptcy sale.
Disputed facts.
Let me now turn to the centrai issues that are in dispute in this case: first, whether Raytheon's
plan for the orderly liquidation of ELSI was reasonably calculated to maximize the proceeds
of the sale of ELSI's assets, and to pay ELSI's creditors; and second, whether the unlawful
requisition of ELSI's assets precluded an orderly liquidation of ELSI and caused its bankruptcy.
The United States has already submitted substantial documentary evidence of its views
on these two disputed issues. Today and tomorrow, we will present testimony by witnesses who
had direct, personal knowledge of these events. Specifically, Mr. Charles Adams and Mr. John
Clare will testify to relevent events associated with the management of ELSI, the preparation
of the orderly liquidation plan and the e:ffect of the requisition on the orderly liquidation.
We will also call on an eminent professar of Italian bankruptcy law, Professar Franco Bonelli,
to explain in detail the content and e:ffect of Italian law with regard to these events.
The Orderly Liquidation Plan
The first of the two key disputed issues deals with the viability of the orderly liquidation
plan. As both Mr. Adams and Mr. Clare will attest, the plan was reasonably calculated to sell
ARRINGA MATHESON 255
ELSI as a Uve business in order to rnaxitnize tbe sales proceeds; Morevoer, tbe plan was reasonably
calculated to pay all of ELSI's credit-ors.
In eurly I968, Raytbeon and Machlett bad llpJ?OÌnted Raytbeon's Vice President, Josepb
Oppenheun to beccml.e ELSI's Cbahi:nan. Mr. Oppenbeirn, hirnself an electtonics engineer,
was anexpert ori: iiltemational sales and transactioris and was tbus ideally qualifìed to plan and
~atry out the ordetlj1iquidation:~ To assisthim, officials of tbe stockholders and ELSI were to
bédivided into working groups to coriduct tbe Hquidation. One group was to co-ordinate tbe
entire plan; anotber was to deal witb the banks and otber creditors; anotber bad tbe responsibility
ti> • handle con:unìtments to customers · and to collect receivables; an d a fìnal group would
co~ordinaté tbe sale o:f · assets.
Tbe cornerstone of tbe pian was to sell ELSI or its product lines as going businesses. At
tbe eridof'Marchì968, ELSlbad orders in band,work in proce1,1s, customer lists, and a list of
e:xpe:tìenced stlPpliers OftaW materìals àri:d comJ?Onents, all ofwhicb could bave been transferred
to a buyer as goingbusiness lìnes. In addition, ELSI and its stockholders selected I30 employees
to maìntain a light assernbly operation to complete work in process and tbereby maintain relationships
with customers. This combination gave reasonable assurance that tbe plan would bave
been: · carried to à · successftil · condusion.
Sale of ELSf as a going business also entailed sale of ELSI's substantial intangible assests.
ELSI ot its ptòduct liri:es Would be offered witb an established riame and reputation, and' witb
customer and supplier telati0nships iritact. This isknown as «goodwilln and was a substantial,
recoverableelement .o:f ELSI's assets. Iri addition, lUytbeon and Machlett would supply necessary
patent and·tràdexnark licerices to purcbasers. Theywould also provide technical assistance
to the newbuyei:'s ofthe ELSI lines, thereby hacking ELSI's purchasers witb tbeir own worldrenowned
expertise in tbe electronics fìeld. Tbis assured tbat purcbasers would, in turn, produce.
higb~quality products. InclUsion of tbese intangible assets in tbe ELSI package would
obviotìsly attract ··a • wider range of potential buyets ànd maximize ELSI's sales proceeds.
The experienced team whìd:i put togetber tbe Hquidation plan planned to use its knowledge
of tbe electronics · corilponents iridustcy to advertize ELSI world-wide, to seek out potential
buyers;an:d to match oneor more.of ELSI's product lines witb eacb oftbese buyers. Mr. Oppénheim
bad world~wide connections witb potential buyers; and alreàdy bad been in toucb
witb Japanese and other firms regardirigtbe possibile sale of ELSI's product lines, including tbe
work-iri-process and raw materials.
Sale to a company orto a combination of companies in Italy, including IRI, was not to be
overlooked. Tbe Respondent's interest in ELSI is evidenced by tbe statements made by tbe
nation.al government before and after the requisition, by tbe extraordinary steps it took to seize
EL$1'$ assets througb tbe requisition,by ~ts leasethrougb IRI~STET, an.d. by the eventual purchase
in bankruptcy by ELTEL. In sum; tbe sale of ELSI or its product lines as live businesses
was not orily feasible, it. was nearly a reality.
Tbis brings me to tbe second aspect of the orderly liquidation plan: tbe payment of creditors.
Would tbe sale of ELSI's assets bave realized sufficient funds to pay ELSI's creditors ? Again,
the answer is yes. ELSI bad three types of creditors: small creditors; large secured and guaranteed
creditors; an d large unsecured; Unguaranteed creditors. Agreemerit witb tbe plan was to
be obtained witb ali three classes.
Prìor to tbe receipt of any ptoce~ds from tbe liquidation, Raytbeon planned fìrst to pay
tbe debts owed tbe small creditors to tninitnize tbe administrative effort during liquidation.
Raytbeon transferred 150 tnilion lire to tbe Fìrst National City Bank branch in Milan to pay
tbe small creditors in ftìll. Memorial, Annex 17, para. 14 (I sbould point out thatthis transfer
was accomplisbed witbout any difficulty under US foreign direct investment regtìlations). Raytheon
would satisfy ELSI's debts witb tbe remaining creditors from tbe sale of ELSI's assets.
Secured and preferred creditors would, of course, take priority. To tbe extent that funds from
tbe sale of tbe assets were insufficient to pay guaranteed loan.s in full, Raytheon would be called
upon to make up the .difference.
256 RASSEGNA DELL'AVVOCATURA DELLO STATO
In the orderly liquidation, Raytheon and Machlett would have received the value of ELSI's
~tssets to be sold as going business lines - at a price likely to be greater than the book value of
17.os billion lire (US$27,2oo,ooo) (Memoria!, Annex 13, Schedule C1). Realization of book
value would have been sufficient to pay off ELSI's liabilities of 16.66 billion lire (US$ 26,6s6,ooo)
(Memoria!, Annex 13, Schedule E) in full, including amounts owed by ELSI to Raytheon. This
would have left 391 rnillion lire (US$62s,6oo) (Memoria!, Annex 13, Schedule E) which could
have been distributed to Raytheon and Machlett as a recoupment of a small portion of their
total investment.
The liquidation team also prepared a worst-case scenario. They calculated that as an absolute
minimum, ELSI's assets would command no less than 10.8 billion lire (US$ 17,28o,ooo).
(Memoria!, Annex 13, Schedule C1). This so-called quick-sale value was not to be used to establish
an offering price, but only to set the lowest possible figure which could be used by Raytheon
in its own internai corporate planning. It is not to be confused with the proceeds Raytheon would
actually have obtained had the orderly liquidation been allowed to continue. The quick-sale
value artificially discounts ELSI's assets and does not take into account the substantial intangible
value of ELSI's product lines.
Mr. Lawrence of Coopers and Lybrand will discuss the actual value of ELSI's assets in
more detail. Suffice it to say for now that even if Raytheon and Machlett had realized only the
quick-sale value of 10.8 billion lire, the orderly liquidation would stili have proceeded successfully.
Raytheon and Machlett could have paid ELSI's preferred and secured creditors and all
of ELSI's smaller unsecured creditors in full. Raytheon would have honoured its guarantees
to pay any guaranteed creditor not fully paid from asset sale proceeds. Thè major unsecured
unguaranteed creditor class would have been paid on a prorata basis from the funds realized
from the sale of the assets.
I t is impossible tostate precisely how payment of the remaining creditors would have progressed,
because the illegal requisition arbitrarily terminated the orderly liquidation. One possibility
was that Raytheon and Machlett could have settled ELSI's credits with the large unsecured,
unguaranteed bank creditors. It would have been reasonable to expect that the unsecured,
unguaranteed bank creditors would have settled their claims ·at approximately 30-so per cent
of value. As Professar Bonelli will describe, in Italy it is common knowledge that settlement
brings creditors prompt and substantial payment as contrasted to the lesser amounts the creditors
are likely to realize through a court-supervised sale bankruptcy. It is thus common practice
in Italy for bank creditors to make such settlements of their claims with failing companies.
Raytheon and Machlett fully intended to allow alllarge unsecured, unguaranteed creditors to
participate in whatever proceeds would have been recovered from ELSI's assets. As Mr. Adams
will tell you in a few moments, Raytheon and Machlett would have been willing to negotiate a
type of revenue-sharing plan with the creditors. If the sale of ELSI's assets had generated sufficient
revenue to pay off creditors at greater than so per cent, Raytheon and Machlett would
have shared that revenue prorata with the unsecured, unguaranteed creditors.
Accordingly, if Raytheon and Machlett had recovered book value or more from the sale
of ELSI's assets, they would have been willing to negotiate an arrangement under which all
creditors- including themselves- would have been paid at 100 per cent of value notwithstanding
any prior settlement commitments for lower amounts. Creditor settlements never carne to
fruition, however, because the illegal requisition of the ELSI assets intervened to make their
sale, as well as settlement from sale proceeds, impossible.
The criticai point, however, is that even assuming for the sake of argument that ELSI's
assets had recovered only 10.8 billion lire, the quick-sale value, as the Respondent suggests
(Counter-Memorial, p. 82; Rejoinder, pp. 237-238), the orderly liquidation would stili have been
successful. And even assuming that ELSI's assets had recovered only this quick-sale value Raytheon
and Machlett would have been in a much more favourable position financially than they
were following the sale in bankruptcy. If the bank creditors with large unsecured, unguaranteed
loans had settled their claims at so per cent of value or less, the liquidation would hav'e cost Raytheon
no more than 3·79 billion lire (US$6,o82,6oo) (Memoria!, Annex 13, Schedule F).
INTERROGATORIO ADAMS 257
Mr. President, it is our intention next to ask that Mr. Char'es Adams be called to testify.
I note that the hour is approaching I 1.30. May I ask the Court's preferences as to whether we
should . proceed with that testimony now ?
The PRESIDENT: We are going to have the break now and will call the witness after the break,
in ten' or fifteen minutes.
The Court adjourned from n .:ao a.m. to I 1.42 a.m.
The PRESIDENT: Please be seated. I call upon Mr. Charles Adams to make the solemn declaration,
the text of which I assume you have been provided with.
Mr. ADAMS: l solemnly declare OI). my honour and conscience that I shall speak the truth,
the whole truth an d nothing. but the truth.
The PRES~DENT: Thank you. Mr. Sofaer.
Mr. SoFAER: Thank you Mr. President, Your Honours. Mr. Adams served in I947 as Executive
Vice-President of Raytheon and in I948 became President of Raytheon. In I964 he
became Chairman of Raytheon's Board of Directors, a position he held until I975· He stili
serves as a Director of Raytheon and is Chairman of Raytheon's Finance Committee.
Mr. Adams was awarded the medal of commendation of the Order of Merit of the Italian
Republic f01: his advancement of the electronics industry in Italy.
Mr. Adams, could you tell us, Sir, the reasons for the Raytheon company's investment in
EL SI.
Mr. ADAMs: Raytheon was interested in usi11g its technology to develop, hopefully, a profitable
activity in Italy. W e ha d the experience of another company where we were joint owners,
where. we had developed on the equipment side - ELSI was the components part of the business
•. W e felt that we had the technology to succeed in this. an d that over a period of time we
were doing something, by operating in Palermo, tha~ was consistent with the objectives of the
Italian Government in helping employment and industriai activity in the Mezzogiorno area.
In our own interests w e hoped to develop a profitable business; we thought we w ere consistent
with the interests of the Government.
Mr. SoFAER: Were there any factors that made you feel that your compimy, ELSI, would
succeed or needed to succeed ?
Mr. ADAMS: W e felt, as we understood the conditions in Italy from our experience elsewhere,
that we needed to have the help of the Government and the Government's industriai activity
area. This was so important in developing, broadening our sales that we felt that we should have
the help, not only in developing markets, but that we should bave the help of the subsidies for
transportation for some of our products and the so-called 30 per cent law which would mean
that we would have a certain fraction of the sales of certain kinds of products in this situation.
Mr. SoFAER: Had Raytheon trained any people to operate the ELSI plant?
Mr. ADAMS: Yes, we used American people to enhance the technical training of the workforce
at the ELSI plant. W e also provided management people from time to time to help in the
organization and development of it as a business. So it was both technical training and management
training that we provided - management assistance.
Mr. SoFAER: Did Raytheon provide other assistance to ELSI?
Mr. ADAMS: We did. Outside of our financial contributions to ELSI, we went out of our
way to provide additional sales. I thitik perhaps a good example of that was the effort that we
made to provide for a components work for the NATO Hawk system. I just take this as an
example. In I959 I was in Paris negotiating with five nations a production programme for the
Hawk anti-aircraft missible system for NATO and the question carne up of who would make
258 RASSEGNA DELL'AVVOCATURA DELLO STATO
the tubes that were involved in this - the magnetrons, klystrons, and other technical types of
tubes. I said that we had one licensee and that was ELSI and that we wanted to see that work
clone at ELSI. Generai Reyneirse, who was the representative of the five nations, said that we
cannot put this whole programme in a position where it depends on one small company in Palermo
- that is a risk that I cannot accept. I said, General, I can assure you that ELSI can
produce these tubes, they are state-of-the-art technology, very difficult and, in order to back
that up, I will assure you that for any tubes that ELSI produces that do not meet the specification
and pass inspection we will substitute for them tubes made by the corresponding Power
Tube Division of the parent company in the United States. That was accepted and ELSI did
the work and its tubes passed every inspection; in fact if anything, exceeded the quality of the
tubes we made in the United States.
Mr. SoFAER: you mentioned that Raytheon had extended financial assistance to ELSI.
Could you tell us the extent of that assistance, if you know ?
Mr. ADAMS: W e made a capitai investment of approximately US$ 12 million and an additional
US$8 million in guaranteed loans for which we were responsible -a total of approximately
US$zo million.
Mr. SoFAER: There carne a time that Raytheon decided to end its investment and to liquidate
ELSI. Could you tell us the reasons for those decisions ?
Mr. ADAMS: We had made every effort to turn ELSI into a profitable activity. We decided,
in 1967, that we would give this one last good try and we agreed to put up another 4 billion lire,
(US$4.5 m1l:i -n), the last of the capitai investment that we put into it. And during that time
we had some added management people that we were able to bring to bear on the problems
there. We decided that we would go around to all the Government agencies, to IRI, to try to
get some help to give us added business, to give us some business that had a consistency and
stability to offset the ups and downs of some of the military work such as Hawk. We found
at the end of that period, as we carne into the spring of 1968, that it just did not work. We
could not get the help that we needed, we were not able to have enough volume of business to
support the workforce there and since we were not in the business of being what I think you could
call « permanent investors », if something could not be tumed to a profitable condition then i t
was the inclination of our Board to dispose of it. W e could not continue to carry losses for an
indefinite period. So a decision was made that we should sell ELSI, either as a whole or by
various product lines, the latter being the more probable approach to this. I think that we had
every reason to believe that this would work. Mter all, businesses are bought and sold around
the world between one country and another and within countries; some organization is offered a
fair price, they may dispose of an activity because there is another organization that is convinced
that they can do better with it. Therefore we felt that we had reached the end of the line,
our patience had run out, we were a tired investor, if you will, and the time we felt had come
to liquidate.
Mr. SOFAER: In your discussions with IRI during that period did you make any proposals
to encourage IRI to participate in ELSI ?
Mr. ADAMS: W e did, we had a meeting with the senior management of IRI and we suggested
that they join with us in the ownership of ELSI as they did with us in Selenia where we had
that kind of an arrangement and the answer was firmly no. They said that they couldn't make
any plans. That they were developing a plan for the electronics industry and that would take
a year or so to develop and they could do nothing in the meantime. Beyond that, they said
they had no money available. At this point, we said, look, perhaps we can buy some of your
share in Selenia which will give you some money which you could then put into ELSI. That
was turned down flat too. So it was perfectly clear to us that this was a total turn-down of our
suggestions neither would they join with us in this business nor would they give us any help.
Mr. SoFAER: So, do I understand you correctly to say that just before your decision to proceed
with an orderly liquidation you offered an opportunity to the Italian Government's company
IRI to participate through monetary investments in the ELSI operation ?
INTERROGATORIO ADAMS
Mr; ADAMs: That is correct.
Mr. SoFAER: And th~y tumed you down?
Mr. ADAM:s: That ìs correct.
259
Mr. SoFAER: Did th~ balance of payments programme in the United States play any role
in bringing you to the decisionto cboose an orderly liquidation?
Mr. ADAMS: No, it .did not .•
Mr. SoFAER: Could you explain why?
Mr. ADAMS: Well, an orderly liquidation would bave provided us with assets with which
we could pay off our obligations there so that there was no need for the money to move from the
United States to Italy. There were mechanìsms by which we could invest. And we did invest
the 4 billion lire (US$ 4·5 niillion) of our last investmerit in that period of time and that US
Go'Vernment balance of payments programme had no effect at ali and our decision was not
based on that.
Mr. SOFAER: Why did you believe, and your company had believed, that the orderly liquidation
prògramme would be successful ?
Mr. ADAMs: W e felt that there was great promise in each segment of the business of ELSI.
W e hadn't been able to malte i t work but we felt that there were others who would. W e felt that
there were oompanies that could ad d these product Iines to existing product lines; com pani es
that were competitots òf ours that might do that; and there was also the possibility of sales outlets
that we had that would like to add the production t0 their activities and we found these product
line$ to bave real promise and therefore real value. The military magnetron line, in the
power-tUbe line, would be brought back up to a high level shortly after this by the so-called
Hawk improvement programme which was an add-on to the originai Hawk programme that
I bave spoken on. There were other ongoing businesses there, we were making tubes for commerciai
marine radars for example; which was a growing business an d we had introduced the
technology ofmicrowave cooking down there at that time. That became in the United States
a very large activity. Our own subsidiary in the United States by 1980 had reached the volume
of soo;ooo units a year which at a value of zoo dollars per unit would be something like US$ 100
million. This was a field in which somebody who wanted to go that way in the appliance business
could bave found very attractive because Raytheon pioneered microwave cooking. We
held the originai patents and the license that would bave gone with that line offered a really quite
exciting opportunity for profit for somebody who werit vidth that. The other lines were in different
positions but we felt that there were conipariies that còuld be identified that would be in-:
terested in each of these lines and that if we could go ahead with an orderly liquidation that would
do fine by us. We would get enough return from these varios sales to meet our obligations and
we ha d people out there with e:K.perience in this kind of things, w ho w ere familiar with the marke~
of Europe and whom we felt could do thitl very effectively. They reported back to us in turo,
having looked into it; if theY could do it. ~ffectively, and.·gave us reason back at the Company
headquarters in the United States to beli~ve th11t tbis plat1 could indeed be carried out successfully.
J ust one other product line aspect of tbis : we were making cathode-ray tubes for televisions
there ; .they were black-and-white. In the United States colour had come in and we helped ELSI
to provide some engineering staff that could bave converted the black-and-white line to a colour
line, depending on which colour systems were chosen in Europe. Actually, that was delayed a
bit but we had staffed that activity so that it would be attractive to a buyer,
Mr. SOFAER: Now, do I gather correctly then that you are saying that Raytheon as a result
of its control of patents and various other types of technology was in a position to extend to purchasers,
either of individuai product lines or of the company in generai, commitments to provide
those purchasers with the opportunity to manufacture those products ?
Mr. ADAMS: Yes, the licenses and know-how agreements that went with each product line
would bave been carried on. With each product line we had an ongoing organization. We had
260 RASSEGNA DELL'AVVOCATURA DELLO STATO
suppliers, a network of suppliers that had been developed, that could provide the high quality
materials that we needed for these high technology products. We had sales organizations. We
had customers in piace. Each of these businesses was a going business. And yet altogether they
weren't profìtable in our hands but we felt that they were attractive to buyers and that with the
very productive work force that we had down there and the ability to deal with these difficult
products that these were almost unique opportunities for a variety of buyers who could have
appeared on the scene if we had been able to deal with that.
Mr. SoFAER: And do I understand you correctly to be saying that Raytheon was in a position
to offer any particular buyer substantial sales that you were expecting from the Improved
Hawk programme with NATO?
Mr. ADAMS: Yes, indeed we were. That lay just ahead and would have enhanced the sales
of the kinds of power-tubes that we had produced in considerable volume in the early sixties.
That volume had dropped off as the productions was completed and the flow of tubes was only
for spare parts and so on. But with the Improved Hawk there was a requirement for new equipment
with new tubes and whoever bought into that business would have had that assured in the
years immediately ahead.
Mr. SOFAER: Did Raytheon expect to make a large profìt as a result of the sale of ELSI or
its lines?
Mr. ADAMS: No, we didn't expect to make a large profìt but we did hope to and expect in
fact to liquidate at something like our book value. We felt that book value was quite secure if
we had been allowed to go ahead and dispose of these assets. This would have ended our losses
and let us get out of the thing with no write-off beyond what we'd already taken.
Mr. SoFAER: Did you feel that the amount you could obtain in an orderly liquidation would
be sufficient to pay off ELSI's creditors?
Mr. ADAMS: We did. We felt if we could have gone ahead with that the way we wanted
to, we could ha ve paid off ali the creditors. If it didn't go quite as well, if we took a sort of worst
case, a quick-sale kind of solution, we could have paid off the people that worked there. W e could
have paid off the small creditors and we could have made a deal with the major creditors at the
40-50 per cent minimum of what was owed to them so that we felt that in the worst case that
was where we would have come out.
. Mr. SOFAER: So it was the business judgment of your company, yourself included, that the
best interests of Raytheon and Machlett required you to end your losses in ELSI by selling in
an organized, orderly liquidation of the ELSI assets.
Mr. ADAMS: That was our conclusion.
Mr. SOFAER: Why did you then put ELSI into bankruptcy at some point?
Mr. ADAMS: We were forced to put ELSI into bankruptcy when the plant was occupied
when the requisition took piace. At that point we were no longer able to bring customers in to
show them a going business, to show them machinery and equipment, let them talk to the people
and get a detailed feel for the line. W e were blocked completely from doing that and as long as
we could no longer conduct the orderly liquidation that I just tried to describe to you, we were
forced by the requisition into bankruptcy. A course of action that we never considered until
the requisition took piace.
Mr. SoFAER: So did the stockholders of Raytheon and the Board of Directors of Raytheon
ever consider putting ELSI into bankruptcy before the requisition had been implemented ?
Mr. ADAMS: No we did not.
Mr. SoFAER: After the requisition you noted that you were unable to show people the plant
and discuss with them the assets of the company. Do you mean to say that your company lost
possession and contro! of the ELSI plant and its physical assets?
ARRINGA MATHESON 261
Mr. ADAMS: Yes, that is exactly what took piace, and when that took piace the vaiues began
to decline because we could no Ionger maintain the machinery in good operating condition,
we could no Ionger work out the conversion of work-in-process into finai product and get that
out, we could no Ionger deiiver to our customers the materia! that they had ordered, that we had
finished or had almost finished there. So that from that moment on - the requisition - we
completely lost control and were forced into an untenable position which again put us into the
bankruptcy condition.
Mr. SoFAER: Do you feei that that situation had an impact on the value of the physical assets
and the inventory and other aspects of ELSI?
Mr. ADAMS! It certainiy dici. As l've said, with the machinery not maintained, equipment
not properly taken care of, no proper house keeping, and ali the rest of it that goes with a going
concern situation, even at Iess than a full-scale operation, we couid not preserve the values which
we were anxious to preserve.
Mr. SoFAER: On that basis, wouid you conclude that any valuatìon, set on ELSI after the requisition
had occurred and this process had continued, would necessarily lack the bases upon which
you ha d ma de your judgments concerning the . orderly Iiquidation?
Mr. ADAMS: Without question. The value that we couid realize was rapidly disappearing
and the situation, months after the time when we were hit by the requisition, was a period of
declining value, unrealizable vaiue from our point of view.
Mr. SoFAER: Mr. President, that ends my questions of this witness. If the Court has any
questions at this time, the Court would be, of course, free to ask those questions. I have previousiy
discussed with my distinguished colleague, Professor Ferrari Bravo, the question of
ltaly's examining this witness ancl as you know, your Honours., we have agreed to permit Italy
to examine tomorrow, if they wish to do so. But at this point I wouid make the witness available
for either examination by the Court or by my distinguished colleagues in the Italian Deiegation.
The PRESIDENT: Well I understand that the Italian Delegation will put questions to the
witness tomorrow morning. Now it seems to me appropriate for the Judges that may want to
put questions, to put questions after the Italian Delegation have put their own questions to the
witness. So I beg Mr. Adams to remain a t the disposal of the Court.
Mr. SoFAER: Veey well. Mr. Adams you will please remain at the disposal of the Court until
tomorrow morning when the examination will continue.
The PRESIDENT: Thank you very much Mr. Adams. AsI inderstand now you are going to
cali Mr. John Clare.
Mr. SoFAER: No, Mr. President with your induigence I would like the Court to cali upon
Mr. Matheson now to continue his recitation of the essential facts that relate to this deiegation.
The PRESIDENT: Very well, I. call Mr. Matheson.
Mr. MATHESON: Thank you Mr. President and distinguished Members of the Court.
As Mr. ADAMS has now testified, the orderly liquidation pian was commercially viable:
ELSI or ELSI's product Iines would have been soid as going businesses and the sale of the assets
was reasonably calculated to pay of ali of ELSI's creditors. Mr. Adams has testifìed that the
requisition was the sole event that prevented the orderly liquidation and that the orderly liquidation
precipitated the bankruptcy of ELSI.
Tomorrow with your indulgence we will cali John Clare to give further testimony on these
matters. In addition, Professor Franco Bonelli will estab1ish the shareholders' entitlement to
an orderly liquidation under Italian law and he will demonstrate that prior to the requisition
ELSI's management was under no obligation to piace it in bankruptcy. He will also expiain how
the requisition caused the bankruptcy as a matter of Italian Iaw.
262 RASSEGNA DELL'AVVOCATURA DELLO STATO
Thus, Raytheon and Machlett had developed a liquidation plan that was financially sound
and legally feasible. However, as they took the first step to implement the pian, the Respondent
intervened. One event and one event alone prevented the orderly liquidation: the unlawful
requisition of ELSI's plant and assets on I Aprii I968.
The requisition cause ELSI's bankruptcy
This brings me to the second issue which I mentioned at the outset: that the requisition
directly and proximately caused ELSI's bankruptcy. We will show that the requisition in fact
prevented the sale of ELSI's assets, that without proceeds from the sale of ELSI's assets ELSI's
shareholders could not settle ELSI's debts with its creditors, and that bankruptcy became, as
a result, inevitable.
Again, I would like to step back for a moment and refer to the circumstances that led to and
directly followed the requisition. It was the Respondent's stated intention to requisition ELSI's
assets to prevent the orderly liquidation. On 27 March, the President of the Siciiian Region,
President Carollo, stated that the Italian Government would seize ELSI's plant and related
assets if the shareholders persisted in liquidating ELSI. He stated « the plant would almost
certainly be requisitioned if ELSI sent out letters of dismissal to its emplyoes " (US Memoria!,
Annex IS, paras. s6-57 and Exhibit F). But President Carollo still made no definite commitment
to Raytheon and Machlett for the future of ELSI.
On 29 March the Generai Manager of the Ministry of Industry, Commerce and Crafts,
spe11king for the Prime Minister of Italy, told Mr. Clare that Raytheon would incur the Prime
Minister's «severe displeasure, if the plant were closed (US Memoria!, Annex IS, paras. 58-59
and Exhibit G). Like President Carollo, however, he would make no written commitment regarding
any Government assistance if Raytheon and Machlett were to keep the plant open. Without
such a commitment Raytheon and Machlett sent out letters of dismissal to ELSI's employees.
On 3 I March the President of the Sicilian Region reported that the Prime Minister had
indicated that an ESPI company would acquire ELSI's assets and that the Government would
requisition the plant in order to prevent the liquidation (Memoria!, Annex IS, paras. 6I-62 and
Exhibit H).
Consistent with his stated intention, on I Aprii I968, the Mayor of Palermo, acting as an
official of the centrai Government, issued an order, effective immediately, requisitioning ELSI's
plant and related tangible assets for a period of six months « except as may be necessary to extend
such period "· On 2 Aprii acting upon legai advice, ELSI's management relinquished contro!
of the company's plant and assets.
Now it is not disputed that the requisition was patently illegal under Italian law. When
the Prefect ultimately ruled, he found in unambiguous terms that the requisition was illegal
because it could not possibly have achieved its stated purposes (Memoria!, Annex 76). He stated
« the order is destitute of any juridical cause which may justify it or make it enforceable "·
Just how unlawful this requisition was can be seen from the plain language of the relevant
statutes. The requisition order was based on two statutes that bestowed extraordinary power
on Italian administrative authorities to dispose of private property for reasons of grave public
necessity (Memoria!, Annex 34). The first statute, enacted in I86s, is only a few lines long:
« When, because of grave public necessity, the administrative authorities must dispose of
private property without delay or, pending a court case for the same reason, proceed to enforce
a measure whose legai consequences are the subject of the dispute, the administrative authorities
will proceed by means of a decree indicating the reasons, without prejudice to the rights of the
parties "·
The second statute established the Mayor authority to issue << emergency and urgent orders
of this character » (US Memoria!, Annex 35). The sta tute states:
« The Mayor issues emergency and urgent orders in matters of civil works, local police and
health for reasons of public health and safety »,
ARRINGA MATHESON 263
The Mayor of Palermo, invoking both of these statutes, cited several bases for requisitioning
ELSI (Memoria!, Annex 33). Among the stated reasons for the requisition were that ELSI's
action << caused a wide and generai movement of solidarity of ali public opinion which has stongly
stigmatized the action taken considering that about r,ooo families are suddenly destituted n,
that « because of the shutdown of the plant a serious damage will be cause to the district n, that
« the local press is taking a great interest in the situation and ,,, is being very criticai toward the
authorities and is accusing them of indifference to this serious civic problem » and that « there
is a grl\ve public necessity and urgency to protect the generai economie public interest (already
seriously compromised) and public order ».
The reasons offered by the Mayor for the requisition are significant because they are completely
at odds with the conduct of the Mayor and other ltalian authoritiesfollowing the requisition.
Despite his · statements concerning the serious consequences of a shutdown of the plant,
the Mayor of Palermo took no effective actions whatsoever to reopen, operate or maintain the
plant. Further, Italian authorities. did nothing to prevent ELSI's former employees from occupyingthe
plant grounds orto terminate that occupation. The Respondent's suggestion (Rejoinder,
p. ·I 84) that the aim of the requisition was not to deprive the shareholders of the ownership of the
plant but merely to regulaté ELSI's assets does not square with the events that actually occurred.
Itis also clear that the requisition preventedthe orderly liquìdàtion of ELSI. As a result
of the requisition, ELSI's owners and management were, as a matter of law, deprived of possession
and control of ELSI's assets and the right to dispose of them. They could not use the plant
in order: to minimize growing losses. They could not complete work-in-process to finished products.
They could not sell any or ali of ELSI's assets, including ELSI's inventory or its workin-
process. Barred from physical access to ELSI, it was impossible to invite potential buyers
to view ELSI's facilities. They could take no steps which would in any way generate operating
income to pay the inevitable bills that would come due. At the same time, ELSI's relationships
with its suppliers and customers were terminated abruptly. ELSI's market position was quickly
seized by its competitors. Any possibility of selling ELSI's product lines as live businesses diminished
rapidly.
It is equally clear that the requisition forced ELSI to file a petition in bankruptcy. The
Respondent made it dear to Raytheon and Machlett that the requisition would be indefinite.
Faced with no prospects of generating income to pay ELSI's creditors, bankruptcy was inevitable
Notwithstandìng the patent illegality under Italian law of the requisition, the Mayor and
other Italian govermriental authorities did not revoke the requisition. Initially, Raytheon and
Machlett hoped that the requisition would be promptly quashed and that they would be able
to resume their plans for the orderly lìquidation of ELSI. Raytheon and Machlett immediately
cabled the Mayor (Memorial, Annex 26, para. 9), tequesting him to rescind the requisition, but
the Mayor never responded. On 19 Aprii, ELSI appealed the Mayor's order to the Prefect
of Palermo (Memoria!, Annex 36) but the Prefect delayed ruling for r6 months unti! after ELSI's
assets had been sold to the Respondent.
A t the same time, it became increasingly àpparent to Raytheon and · Machlett that the requisition
would last indefinitely. On 20 Aprii 1968, President Carollo delivered a memorandum
to Mr. Oppenheim. This memorandum ìs attached as Exhibit 38 to the United States Memoria!
and it clearly showed the Respondent's intentions. The memorandum stated in part:
« On the premise that the intent of [Raytheon] is that of liquidating ELSI, I shall herein
explain the reasons why i t is absolutely impossible that this can · take piace for the time being.
r. Nobody in Italy shall purchase, that is to sày IRI shall not purchase neither for a low
nor for a high price, the Region shall not purchase, private enterprise shall not purchase.
Let me add that the Region and lRI and anybody else who has any possibility to influence
the market will refuse in the most absolute manner to favour any sale while the
plant is closed.
4· In the event thàt the plant shall be kept closed, waiting for Italian buyers w ho will never
materialize, the requisition shall be maintained at least until the courts will have resolved
the case. Months shall go by »,
264 RASSEGNA DELL'AVVOCATURA DELLO STATO
Following receipt of this memorandum, it was clear that the requlSlt!On would not be
promptly quashed and the orderly liquidation would not be resumed. In this posture, ELSI's
counsel advised ELSI to file a petition in bankruptcy. ELSI's shareholders had been relying on
the sale of ELSI's assets to generate revenue to pay ELSI's creditors in an orderly manner.
The requisition, however, essentially froze ELSI's assets and prevented their sale. It was obvious
from President Carollo's statements that this was exactly its intended purpose. After the requisition,
creditor demands intensified substantially. Unable to generate income, ELSI was
no longer able to remain sufficiently liquid to pay its creditors and was unable to make payments
when due.
Had there been no requisition, funds certainly would have been made available from the
business of the company to meet payment obligations. Alternatively, if the assets were free,
Raytheon and Machlett could have extended additional funds to the company to allow it to meet
foreseeable payment obligations with the expectation of obtaining repayment from asset sales.
However, under the circumstances, it was clear that this money would be lost forever. In consideration
of its own shareholders, Raytheon and Machlett decided that they would not advance
funds to make this payment. Thus, on 26 Aprii, ELSI's Board of Directors voted to file a voluntary
petition in bankruptcy, citing the requisition which deprived the company of liquid assets
as the principal cause (Memoria!, Annex 43). ELSI was found bankrupt on 16 May 1968 (Memoria!,
Annex 44).
I would like to return to a thought that we raised at the outset. The Respondent clearly
wanted ELSI for itself yet was unwilling to participate in ELSI on a lawful commerciai basis.
The Respondent's tactics continued following the requisition. Despite renewed statements that
the Respondent intended to acquire ELSI for itself, the Respondent did not promptly pay a market
price for ELSI's assets.
Moreover, the Respondent's repated statements that it wanted ELSI for itself effectively
deterred ali other potential purchasers from the bankruptcy sales. Although the Trustee in bankruptcy
received inquiries from parties interested in purchasing ELSI's assets, these parties had
no incentive and received no encouragement to pursue their interest. In addition, so long as the
plant was occupied by former ELSI employees, it would have been diffi.cult, if not impossible,
for the Trustee to show the plant and assets to prospective purchasers. IRI was thus effectively
insulated from having to compete for ELSI at a freely determined market price.
On 25 July 1968, the Ministry of lndustry, Commerce and Crafts announced to the Parliament
that the Italian Government intended to take over ELSI's plant through one of IRI's
subsidiaries. He further indicated that Italy was considering a generai creditors' settlement outside
the bankruptcy process (Memoria!, Annex 46). On 13 November 1968, the Government of
Italy announced that an IRI subsidiary, called IRI-STET, would take over ELSI, without a
creditor settlement (Memoria!, Annex 27). In December IRI formed a new subsidiary in Palermo
- Industria Elettronica Telecomunicazioni (known commonly as « EL TEL ») - to take
over ELSI's plant and assets.
One would have thought that the newly-formed company would have bid on ELSI at the
first bankruptcy auction. But it did not. Subsequent events suggest that this too was part of
a national government pian. In Aprii 1969 the President of the Sicilian Region - President
Carollo - explained that EL TEL's decision not to bid was part of a national government pian
dating back to October 1968. Under this pian IRI would purchase ELSI fora sum of 4 billion
lire, It was even agreed that IRI would be absent from at least the first auction, and would participate
only when the price was precisely 4 billion lire (Memoria!, Annex 59).
In fact, IRI did riot appear at either the first or the second bankruptcy auctions. On 18
March 1969, a Sicilian newspaper reported that IRI and the Trustee in bankruptcy agreed that
IRI would acquire ELSI's assets beginning with a lease of the plant for 1 so million lire followed
by a negotiated purchase of the assets (Memoria!, Annex 56). Interestingly, the Prefect, who had
pending before him Rahtheon and Machlett's appeal of the requisition took an active part in
the negotiations of this lease agreement. Conveniently for IRI, he continued to delay ruling that
the requisition was unlawful until after IRI had completed its acquisition.
daysAnnex
""""""'o'" ~.~:lminil;tt~ttiv·e appeal
proposition
,u ......... n •• ali of the ream:
ll,lt,n:u in fat less than one year. In Société
annl.llle·d the requisition order in three days. In cases not
cited by the Respondent, the period is similarly short. The 1964 requisition of Sbordoni
Ceramica requisition was annulled in one day; the 1966 requisition of SCAC was annulled
in one day; the 1961 requisition of Borsalino was annulled in six days (Memorial, Annex z6, para.
x o).
Severa! of the requisitions cited by the Respondent occurred after 1971 and therefore do not
support the statement made in Annex 30. After 1971 requisition orders could alterntely be appealed
to a Tribunale Amministrative Regionale, a judicial court. Appeals to this judicial court are
by their nature a more protracted judicial process and therefore are not relevant to the average
time period in which prefects would rule.
266 RASSEGNA DELL'AVVOCATURA DELLO STATO
Respondent also finds fault with Raytheon and Machlett for delay in filing a motion requesting
the Prefect to expedite its ruling with regard to the requisition. Raytheon and Machlett did
exercise this right under Italian law. Doing so sooner, however, would in no way have affected
its position with regard to the dispute. Raytheon and Machlett appealed the requisition to the
Prefect on 19 April 1968. The first oppurtunity Raytheon and Machlett would have had to request
the Prefect to expedite his decision would have been 120 days following the appeal, i.e.,
in mid-August 1968. At this time, the sale of ELSI's product lines as viable businesses was an
impossibility. Moreover, even if Raytheon and Machlett had requested an expedited decision
at an earlier point in time, this does not guarantee that the Prefect would in fact have heeded the
request and issued a ruling. Thus, the timing of Raytheon and Machlett's request for an expedited
decision from the Prefect is immaterial to the dispute before the Court.
Had the Prefect quashed the requisition withìn the typical time frame for actions of this
type, Raytheon and Machlett could have resumed the orderly liquidation. If the Prefect had
overturned the requisition shortly after the filing of the petition in bankruptcy, ELSI could stili
have withdrawn the petition.
The trustee in bankruptcy brought suit on behalf of ELSI's bankrupt estate based on the
Prefect's ruling. The Court of Appeals of Palermo found that the Trustee was entitled to compensation,
but only for the loss of use and possession of ELSI's plant and assets during the sixmonth
requisition period. This decision was upheld by the Supreme Court of Appeals. The
rental value awarded by Italian courts to compensate for the illegal requisition falls far short
of the actual losses sustained by the shareholders as a result of the Government's illegal requisition.
Indeed, on its face, the compensation awarded does not purport to compensate for anything
other than the six-month rental value.
Finally, I would like to respond to the Respondent's allegations that Raytheon, Machlett,
and ELSI officials acted in violation of Italian law. Respondent in this case has levelled serious
accusations and has gone so far as to accuse the management of these companies with reprehensible
criminal conduct. As Professor Bonelli will discuss, Respondent has not established a single
violation of Italian law by Raytheon, Machlett, or ELSI management. Professor Bonelli will
demonstrate that ELSI's shareholders were entitled to liquidate ELSI's assets as a matter of
Italian law, that prior to the requisition ELSI was under no obligation to file a petition in bankruptcy,
that the requisition caused ELSI's bankruptcy, and that in other respects Raytheon,
Machlett and ELSI management were in compliance with Italian law.
Mr. President, I now note that our intention in the order of the case was next to ask Mr.
Bonelli to make an extensive statement with respect to the Italian law which governs these matters.
I note that the time probably will not allow him to get very far into that statement if we
begin now. Could I suggest that perhaps we can begin with that statement tomorrow morning ?
Mr. PRESIDENT: Yes, we will begin with the statement of Professor Bonelli tomorrow morning
at 10 o'clock. Thank you very much.
The Court rose at 12.23 p.m.
C 3fC;R89f2
Tuesday 14 February 1989, at 10 a.m
Mr .. FERRARI BRAVO- Mr. HIGHBT - Mr. ADAMS- Mr. MATHESON- Mr. CLARE -
Ms. CHANDX.BR - :Mr. :Bò]loll!LLI ~ Mr. FAZZALARI - JunoB ScliWBBBL
.· The PRESIDBNT :. Please sit down. . The sitting is open. . .
I understand that there is an agreement between the parties to call Mr. Adams first .this
morning,.to be cross-examined by the Italian delegation. Thetefore T call upon Mr. Adams
to come into the Grande Salle de Justice.
GoQd mo~ing Mr. l\.d11ms. You )'Vill be cross-examined by the Italian delegation.
Mr. FERRARI BRAV'O: Mr. President, withyour permission l would like to ask Mr. Keith
Highet, Counsel for the Italian Government, to put some.questions to this witness.
The .. ~II)a:N'r: ··Mr. ··Highet; · pleil:se.
Mr. HtGHBT: Th~tl!t ;~~ Mr. P~esid~nt, Mr. President andlVlembers of th~ Court.
If I. may, 1\llr. Adams;l would like to thank you most w!!rmlY for your wilUngness to remain
at the disposition of the Court of course and of our delegation so that we could put our questiona
to you this moming. . . •
First, if I may, let me ask you one or two background questions. I noticed reading over the
matetial again last nighf that you have been a t Ràytheon for about 42 years almost, an d l would
suggest that you probably have very little question in.your own mind that Raytheon is one of the
finest companies in the United States.
:--·: :. :·· . ::: ..
Mr. AnAMs: Of course, I bave that view.
Mr. HIGHBT: And wouldn't it be tru.e, lV(r, Adllltls1 really, to say that Raytheon has accomplished
over the years certainly since VVorld War II many things that have set it at the topin
the first rank - of the high teéhnology ~ompanies in the world ?
Mr. AnAMs: I think that is a reasonable statement.
Mr. HIGHBT: Would you say also that there was a special quality about Raytheon- a
cettaìn independence, flexibility, ilitelligent . use · of htiman resourees, whatever it is - that
there was a certain quality about Raytheon in the way · it handles business affairs and • has done
so over the years both in the United States and abroad?
Mr. AnAMs: We like to think that we bave conducted ourselves correctly and properly.
Mr. HIGHBT: That's excellent. That's what I thought. Again, it is a pleasure to have you
bere.
As a generai matter in Europe, in the mid-196o's or possibly in the 1950's verging into
the 196o's, how many rea! competitors did Raytheon have in the electronics field in Europe,
just roughly ?
Mr. AnAMS: I couldn't tell you, I am not familiar enough w!th them, the princìpal field
in which we competed was doing work for the various governments and that was · our more
important areas; the number of large companies I could'nt give you the precise number.
Mr. HIGHBT: Let us say more than five or more than ten? I mean major companies.
Mr. AnAMs: Oh not more than ten.
Mr. HIGHBT: So, Raytheon was in the lead both in the United States and in Europe of
electronics and high techriology work at that time as it is today ?
268 RASSEGNA DELL'AVVOCATURA DELLO STATO
Mr. ADAMS: I think that is a fair statement.
Mr. HIGHET: Now if I may turn, Mr. President, to the question of the so-called « orderly
liquidation », your testimony, Mr. Adams. yesterday included a description of the effects of
the requisition of I Aprii I968 as you saw it.
I will make, Mr. President, if I may, references to the verbatim records in context; this is
to page 260. You stated that as << long as we could no longer conduct the orderly liquidation that
I just tried to describe to you, we were forced by the requisition into bankruptcy » - that is
at page 260, Mr. Adams - and you concluded by saying, « So that from that moment on- the
requisition - we completely lost control and were forced into an untenable position which
again put us into the bankruptcy condition » (pp. 26o-26I).
Now, were you aware, Mr. Adams, that on 2 March I968 ELSI's books of accounts and
accounting documents were moved to Milan ?
Mr. ADAMs: When you ask questions about the detailed schedule of what happened in
Italy you should refer it to the next witness Mr. Clare who was on the spot.
Mr. HIGHET: Thank you. Ali right, I will make a note of that. And that will take me
right along. You will remember of course, you were present at the Board meeting of 16 March
1968 which was held in Rome, which was the Board meeting that determined, from the point
of view of ELSI's Board, the decision to handle the liquidation. Did you ever hear, or were
you aware, that his Board meeting or the decision taken at the Board meeting had any subsequent
effect on the employees of ELSI ?
Mr. ADAMS: No, I would not comment on that.
Mr. HIGHET: W ere you generally aware of the. occupations of the plant in early 1968?
Mr. ADAMS: In early 1968? At what time?
Mr. HIGHET: Say in March 1968, and possibly earlier, were there any protest meetings
by the workers ?
Mr. ADAMS: I have no clear recollection of that.
Mr. HIGHET: Thank you. Now, turning back to your testimony Mr. Adams, yesterday
you said, and the reference is to p. 260, you said yesterday that on the « worst case » or " quicksale
» analysis, you could stili have paid off the people who worked at ELSI.
And you also said, at p. 258 in part of your generai background, that « we were not able
to have enough volume of business to support the workforce there ». Do you ha ve any knowledge
as to whether ELSI ever met the March payroll ?
Mr. ADAMs: No.
Mr. HIGHET: Do you remember at any point learning that the Region of Sicily paid the
workers from the month of March through August 1968?
Mr. ADAMs: March through August, I can imagine that they might have paid them from
I Aprii.
Mr. HIGHET: And you d.on't remember?
Mr. ADAMs: Not after we were out of the picture.
Mr. HIGHET: I would like to refer again to your testimony on p. 258 and, if I may, I
would like to quote i t. Y ou sai d:
« Mter ali, businesses are bought and sold around the world between one country and
another and within countries; some organization is offered a fair price, they may dispose
of an activity because there is another organization that is convinced that they can do better
with it. Therefore we felt that we had reached the end of the line, our patience had run
out, we were a tired investor, if you will, and the time we felt had come to liquidate »,
· CONTROlNTERROGATbRIO ADAMS 269
And you remember the meeting that you did attend ·in Rotne in February, 20 February
1968, with Mr. Clare and Mr. Profumo and Mr. Hillyer with Mr. Carollo?
Mr. ADAMS: Yes, that is the one of which we have a memorandum from Mr. Hillyer.
Mr. Hm$-r: That is correct, Sir. And he kept hand-written notes of that meeting. In
those. han&•written notes, or minutes, i t sho,ws that you sai d, as a quote given to you I think
by your initials, « while we can continue [we being Raytheon] to provide ELSI with management
aJ1Q, technqlogy we cannQt provide t:noney, witho1.1t which :E;LSI will shortly disappear ». Do
)16\.t :i't~t:nember that gener11lly? I know it it:~ a long time ago.
Mr, ADAMs: l see it in Hillyer's notes.
Mr: HtGHET: · GMd, excellent. It is also in the hand-written notes, but not in the typed
versions, that « the date of 8 March was stressed repeatedly as the absolute litnit for a shutdown
d1~e to a total financial crisis », This doesn't appear in either of the typescript notes but
it' does · appear in the hand-written miriutes - this was Mr. Hillyer's characterization of what
the discussion was. He says in his notes that.this. view was expressed << tepeatedly ». Do you
have a recollection of the view being expressed repeatedly that this was a total financial crisis ?
Mr; ADAMS: W e. are attempting to make i t clear that this money, the last money that we
would put in, was going to run out somewhere along this period of time. 8 March was picked
as the ·date, but i t may have been later than that by a certain amount. W e had emphasized, by
repeating i t, that the determination of our management was that we cotild not put more money
into continuing ELSI in operation;- as the outlook was at that time; and the emphasis was to
ma:ke that point.
Mr. Hto:a:E'f: That is very understandable.
Mr. ADA~$: That was a: decision. by Mr. Phillips, the President, and myself and had been
referred to the BQilrd of Raytheon.
Mr .. · HtGHET:- I see, because yesterday you did say, in the passage I quoted a bit earlier,
about when you realized you were a tired investor and stated that « we felt we had to liquidate >>,
Obviously that comment really should be seen in the- context of possibly a less than voluntary
feeling - that possibly this feeling that you had to liquidate was caused by circumstances.
W otild you thirik that would be a fair characterization ?
Mr. ADAMs: Well if you run out of money With which to operate, the time has then come
to do something, and the something was to liquidate, to sell the business in e:ffect.
Mr. HIGHET: Do you have any knowledge, Mr. Adams, whether Raytheon or its agents
could have sought to piace the assets, the product-lines, the plant, in an executory manner even,
by discussing it with the Mayor of Palermo or his appointed manager in that period between
I Aprii md 26 Aprii, when the barikruptcy was voted ?
Mr. ADAMS: I wasnot on the scene and the decisions as to how one would proceed in a
tactical sense - if I can use. that expression as compared to a strategie sense which were the
major dedsions made baçk in the headquarters of the Company, - were m11de there on the spot
by people w ho were aware of the relationships with the · Mayor an d so on, which I was no t. So
there again, that was beyond the reach of my responsibility. W e were not attempting to micromanage
this situation, if you will, from afar in the United States. We were dependent on the
very able people we had on the spot, who were headed by Mr. Clare, from whom you will hear
later.
Mr. HIGHET: I understand that. Nonetheless, it certainly appears from the record, does
it not Mr. Adams, that there were an extraordinary volume and intensity of meetings in the
first three months of xg68? I think the figure 8o- has come into the record. And for many of
these meetings you made some trips, did you not ?
Mr. ADAMS: I believe I made only this one, which I see in the record that I wa:s present,
recorded by Hillyer.
18
270 RASSEGNA DELL'AVVOCATURA DELLO STATO
Mr. HIGHET: I see. May I ask you if you ha d an impression, either from on-the-spot
observation or from Lexington, when the real decision was made to liquidate ? This relates
to your testimony yesterday and also relates generally to your affidavit, but i t is difficult to actually
find out when the decision was made. Part of Mr. Clare's affidavit seems to imply that after
the Selenia swap acquisition was turned down by IRI, which would have been roughly September
1967, it seems to imply that that was the time that top management in Raytheon made the decision
to pull out.
Mr. ADAMS: The clear decision that Raytheon management made was that we would put
no more money in, and as we began to approach the date at which the money would run out -
which wouldn't be determined with all that degree of precision - we began to consider what
to do a t that point. I can't put a precise date on it without going back to a lot of records that I
haven't got with me.
Mr. HIGHET: In generai, the decision not to put more money in, if i t were made in September
or the fall of 1967 or even December, theoretically would have left a two to three to four-month
period, would it not, in which senior management, one way or another, would have seen to the
commencement, even internally, of an orderly liquidation process ?
Mr. ADAMs: It was important for us to keep the operation running as efficiently and as
effectively as we could up to the date where it was clear that the decision to liquidate could be
implemented, and therefore the decision to do that was kept very confidential so that the workforce
would not fall apart and get concerned, and that lower management people would keep on
going. We felt it was in the interests of ourselves, and probably of everybody else- it would
do them no harm at least - that we keep the decision to liquidate confidential amongst our
own people until the moment carne when we were prepared to go ahead and do that.
Mr. HIGHET: Thank you Mr. Adams. Would you say that even if the decision to liquidate
were kept confidentially amongst the senior executives or in the senior echelons of Raytheon,
was there any deal, do you remember, in that period of late 1967 or early 1968; do you recall
at the moment whether any bids were received or whether any indications of interest were
received by competitors, by firms who were not already in the business but possibly saw an
opportunity? Also do you remember anybody going out and trying to encourage this kind
of piecemeal disposition of ELSI ?
Mr. ADAMS: As I said a moment ago, you cannot put the word out that you are going to
liquidate before you arrive at that moment. If the word isn't out that you are going to liquidate
who is to know and who is to come and ask you if you are interested in selling ?
Mr. HIGHET: But there were not any confidential discussions that you recall?
Mr. ADAMS: No there were not.
Mr. HIGHET: Earlier this morning you confirmed my understanding of what an excellent
company Raytheon is. Now you talked yesterday about how ELSI's product-lines could have
been sold off, and possibly in a very beneficiai manner- or possibly even ELSI herself- yet,
if Raytheon could not succeed in making a success out of ELSI, what might have led you to
believe that anybody else, any other company, could have made a go of it?
Mr. ADAMS: Over a period of time Raytheon itself, the parent company, disposed of operations,
some of them perhaps set up as subsidiary companies, where we could not succeed and
where there were buyers who felt there was real value in adding this to their activities, and
we negotiated sales. So this is not an unfamiliar course of action. We disposed of one very
recently. If you look at the American scene, at least, you see people disposing of activities to
others. If you are a very small player in a large scene and you haven't got a big enough piace
to really be able to make it work, someone who is a larger player on the scene, if you will, by
adding that, may be adding some real value and productivity to their own operation. It's this
sort of line of thought that led us to see what we thought was a very promising outlook for
disposing of these operations at ELSI.
CONTROINTERROGATORIO ADAMS 271
Mr. HIGHET: In your testimony yesterday (l am referring to p. 258), you referred to
your attempt to interest IRI in joining with you in ELSI as it had joined you in Selenia. I
found this difficult to understand, Mr. Adams, and I wonder if you could help me. Why would
IRI have been interested if ELSI was in a state of financial crisis ?
Mr. AnAMS: IRI was not unused to loss operations. I think if you study the activities of
IRI over a period of time you will see that they were supporting, in their various divisions or
operations or whatever, activities that were losing money, and they were carried on for the
benefit of the Republic of Italy, as I have understood it. I t didn't seem to us out of order that
they might take on another one hetè, particulàrly since it was supposed to be helpful to the
economie situation in the Mezzogiorno.
Mr. HIGHET: One of the points thàt was made here (p. 258 again) was that you referred
to the possibility of IRI buying in and using cash, but because it didn't have any cash it would
use cash from the .sale of Selenia to Raytheon, a portion of Selenia. But if Raytheon had been
offered to swap its interest in a very profitable coli:J.pany for an interest in a very unprofitable
company, that was also a competitor of the profitable company, would Raytheon have clone
the same?
Mr. AnAMS:. Let me get that straight. What is the profitable company that you are referring
to?
Mr, HIGHET: I would beli e ve. Selenia.
Mr. AnAMs: Selenia was marginai.
Mr. HIGHET: Marginai, but it was not in a state of total financial collapse as was ELSI.
Mr. AnAMS: Selenia, I think would be fair to say, was bettet off financially than ELSI.
Mr. HIGHET: Well, I seem you take my point. You said yesterday that Raytheon and ELSI
could have offered license and know-how agreements to prospective purchasers and you said
that, p. 260, « these were alli:J.ost unique opportunities for a variety . of buyers who could have
appeared on the scene if we had been able to deal with that », Now these buyers could have
been anybody, · including your competitors ?
Mr. AnAMs: Yes.
Mr. HIGHET: Subject, of course, to problems of anti-trust and other things, hut there
would be no problem with licensing, making agreements with companies in Europe ?
Mr. AnAMs: Companies that were in Europe and were competitive.with ELSI is what
I am talking about, not necessarily competitors · of Raytheon.
Mr. HIGHET: But, as I remember, there was a lot of Raytheon know-how and technology
which essentially you referred to as being capable of accompanying any transfer of technology
and licenses. Would the royalties and expenses and other costs for these elements have been
substantially on the same level as they were to ELSI from Raytheon ?
Mr. ADAMS: We would assume that we would have rèceived some continuing licensing
income from these activities in the hands of others. Mter ali, we would have had some control
over to whom we were selling, as we dealt with this situation. We did feel that to enhance the
value of the activity that we were selling, the opportunity to have some Raytheon continuing
assistance to carry on the techniCal development of that activity and give it real life, would be
a reasonable way to go. If we cut off the continuing license and so on, the operation of that
part of ELSI that we were dealing with, would have had a !esser value to a prospective buyer.
Mr. HIGHET: Mr. Adams, you indicated in your testimony, pp. 258-259. that « other
companies could have been interested in buying some or ali of ELSI's product lines and plants »,
and I also remind you or refresh your recollection about the Clare Report, the 1967 report,
the « Project for Financing and Reorganization of the Company », which as the Court will recall
is Annex 22 to the United States Memoria!. And in your affidavit, which was Annex 9 to the


272 RASSEGNA DELL'AVVOCATURA DELLO STATO
Memorial you then stated that you agreed with the conclusions of the Clare Report. You still
hold that opinion, I take i t?
Mr. ADAMS: I haven't reviewed this.
Mr. HIGHET: You have no reason to have changed it?
Mr. ADAMS: No. Not that I am aware of.
Mr. HIGHET: Thank you. In page 40 of the Clare Report, and it is probably the most
concise part I can refer to this point, it says that for a prornising expanding future for ELSI,
Raytheon's own experts had concluded in that report that it would be necessary: (1) to have
additional capitai investment of 6 billion lire from the Italian State; (2) new product line; and
(3) financial help, which would be essentially the social benefits of the transport costs and Mezzogiorno
benefits in the training allowances.
The Report also stated that it is therefore necessary to make effective the laws governing
the financial help in these areas, from both the regional government and the centrai government,
and to have them favourably interpreted. You remember this ?
Mr. ADAMS: In generai.
Mr. HJGHET: In generai. No, I am not trying to hold you to it ... in principle you have
the idea. That's at p. 41 of the Clare Report, Mr. President. Now, your affidavit also summarized
those requirements at paragraphs 21 to 28, and you said in your affidavit that ELSI had
no choice but to develop new product lines if it was to be self-sufficient. That's paragraph 26.
You also said in paragraph 24 that if ELSI was going to be successful it has no choice but to
obtain a major Italian partner. And finally you commented - you picked up the point from
the Clare Report - in your paragraph 27, and you said
« as a result of Italian laws which required that shareholders supply additional capitai or
cease operations upon the occurrence of specifìed events, it was evident that an infusion
of capitai was necessary to sustain ELSI until it received the benefìts of having an Italian
partner, Mezzogiorno benefìts, and new product lines "·
Now my question to you is this. Would the same problems not have confronted any other
purchaser of the plant or the product lines of ELSI ?
Mr. ADAMS: Not necessarily, it depends on the nature of the other business. If one found
another firm, for example, if it was interested in the X-ray tube line it would be highly likely
that they would have an associateci activity to which this was an incrementai add-on and that
that, added to their existing business, would become economical and be profitable. That would
have put them in quite a different position than we were in.
Mr. HIGHET: lt really depended, in other words, on the facts and circumstances of the
case and on the particular qualities of the prospective purchasers.
Mr. ADAMS: Yes, it would.
Mr. HIGHET: But the point I am trying to make, Mr. Adams, and I think that I feel us
converging on this, is essentially that there would have · had to have been special characteristics
for a potential purchaser of ELSI's product line and plant, would there not?
Mr. ADAMS: It was a very wide spectrum of potential possibilities, depending on the line.
AsI tried to make the point yesterday, it would be an add-on to anybody's business. But whether
it could be a supplier who then had his own source instead of buying from us, whether it could
be a customer who would like to add his own production, whether it could be a competitor, there
was a very broad spectrum of people whom we felt could be interested in these various activities.
You must remember that the opportunity to explore this in detail would have involved making
it known that these activities were for sale, being able to bring these people in to show them
the activity, to show them the product, to discuss it in detail. But all that was not possible.
It was never possible for us because the moment between. the time when it could be known
that we were going to do this, as I tried to say earlier, and the moment that we could have
started to show them, carne the requisition which made this impossible.
CONTROINTERROGATORIO ADAMS 273
Mr. HtoHE'i': Were there any discussions during the month of March when the Board
decision had been taken and when the senior management of ELSI, as I recall, had been spoken
to by Mr; Clare and the others? Do you remember if there were any discussions with potential
buyers at all ?
Mr. ADAMs: No, there were none that I was aware of .
. .• •••.• . Mr. :f:IlGHET: TurnÌll.g to a diffe~;ent point, Mr. Adams, you recall you were then, of course,
Chaitnl,!lllf you were stili Chairman of the Finance Committee and you have doubtless, as many
of .us do, a sharp and melancholy memocy of the Foreign Direct lnvestments Programme instituted
by President Johnson on 1 Januacy I968. As you recall, that programme really had a very
limiting effect for a couple of years on Americ!ln business, particularly those dealing with their
:wholly owned or niajority o\VJled !!Ubsidiaries in Western Europe. lt was particularly harsh on
ln,vestmcmta in Western; Europe and Japan and it contained all !lOrts of irritating and vecy costly
provisions for certifying guarantees, additional draw downs, additional borrowings for making
investments, even as you will recall, going so far as penalizing or at least limiting transfers on
open account which happen to go across a year end accounting period. Now you said yesterday,
and that was at p. 259; in response to a question from Judge Sofaer, tbat tbe balance of
payments programme which was brancl new at that time; - you remember it was only three
m.onj;hs, old - did. not play any role in btinging you to the decision to cboose an orderly liquidation?
Mr; ADAMS: No, it did not; .·
. Mr. HroHET: Indeed in the 1968 annua! prospectus, whicb was filed witb your 1968
xoK with tbe SEC, in a .footnote I think a comment said tbat - tbis is quoted in tbe
Rejoinder,~«the planned operations of Raytheon's foreign subsidiaries and affiliates aredependent
to an unpredictable degree on United States Government regulations on foreign investments >l,
.And then later on, two or three years later, before the programme was finally terminated, mucb to nòbody's sadness, in your roK, Raytbeon acknowledged « tbe continuation of tbis payments
ptogtatnme migbt resttict Raytheon's abilìty to develop its international operations )), My
question is tbis: even if the OFDI Programme might not bave had a negative effect on tbe
trans;:totions conceming ELSI in 1968, isn't it true that it would necessarily bave bad to bave
a negative effect on Raytbeon had ELSI continued in operation?
Mr. ADAMS: Yes, but there was a decision not to go on, so we bad no problem. Tbe decision
had been made tbat the amount of capitai that we put in was the end. Now if Raytbeon bad
been in an expansionist mood, if we were going to fund large activities at ELSI, or if we were
going to acquire other foreign companies, if we were going to do things of tbis kind, tben tbis
exchange control, migbt have been considered. However, you must remember tbat my memory
of events of 20 years ago is perhaps not quite as precise as you bave suggested that it is, and
witb respect to the amounts of money involved witb ELSI (for example if we bad bad to advance
tbe money in order to pay off some of tbe smaller creditors, ·or do sometbing of tbis kind, tbese
were small amounts) and undet tbe terms of tbat regulation, as I remember it, we would bave
bad no difficulty witb tbat, so tbat tbe decision that we bad made to no ·longer invest in
ELSI was not because we no longer could move the money to invest in ELSI, but we made it
because we didn't think that this was !l pl,'omising piace to put our sbarebolders funds.
Mr .. HIGHET: Now I come to my last line of questioning, Mr. President. Tbe impression
has been given and we will be coril.menting later .of course; that there bas been little if any
public assistance, or State benefits, to ELSI. l am not saying that you can answer tbis question,
Mr. Adams, but do you recall tbe public assistance given by the Italian State in tbe form of
low interest loans in 1956-1966? Do you remember vecy large loans?
Mr. ADAMS: You are going b~tck a long way.
Mr. HIGHET: Well, just to refresh your recollection, beeause tbere was about 7 billion lire
made in 1956 to Ig66 by the regional agency, I refer to Annex II, p. 2 and Annex 22, pp.
33 and 35· Turning from tbat kind of assistance to tbe other kind whicb is tbe Italian Govern274
RASSEGNA DELL'AVVOCATURA DELLO STATO
ment benefits that were more immediate, and were that required to help ELSI succeed, I refer
to the testimony you gave yesterday at p. 257· This included the so-called Mezzogiorno
benefits which contained a preferential 30 per cent purchase requirement for finished goods
from the South of Italy. I also referto transportation subsidies. Did anybody ever suggest to
you or any other senior executives of Raytheon that ELSI had a right, a legal right to get those
benefits?
Mr. ADAMS: Well, I would put it this way, that we understood that a legislation existed
that said that these benefits would be available to companies operating in ,the Mezzogiorno
area. W e therefore assumed that they would indeed become available to us and the facts of the
matter were that they did not. I t is my understanding, for example, in respect of the 30 per cent
law, that we were suffering from a very low volume of sales of-ray tubes that were made in
Palermo in the Mezzogiorno when a t the same time-ray tu bes of that nature were being bought
from Philips or other suppliers outside of Italy, so we thought that this was an unfortunate circumstance.
Mr. HIGHET: Do you remember checking or having counsel check or having somebody
run i t down as to whether or not those benefits were only for finished products?
Mr. ADAMS: I don't remember that. I believe that those benefits, I am now talking about
the transportation benefits, I think that it should have involved, as I remember, and my memory
is not that precise of all of these events 20 odd years ago, that the raw material coming to the
plant in Palermo, as exemplified by cathode ray tubes, would have some transportation subsidy
and then the shipment of the finished product would have some transportation subsidy. In the
case of cathode ray tubes, as I think I said yesterday, they were very heavy and very bulky and
this is what gets you into a maximum transportation cost. They take a lot of room in whatever
vehicles, and they were heavy at the same time and they had to make a round trip if your market
was Northern or Centrai Europe, as was the case.
Mr. HIGHET: I understand that, Mr. Adams. What I am really groping towards is if ELSI
thought that ELSI, or Raytheon thought that ELSI, had a right to claim these benefits, and the
benefits were not obtained, what was clone to remedy that?
Mr. ADAMs: You would have to ask other witnesses or our other witness, Mr. Clare, who
was there in Italy working on these problems.
Mr. HIGHET: I see. Mr. PresidentI have no further questions. Thank you, Mr. Adams.
The PRESIDENT: Thank you. Do any of my colleagues, the Judges want to put a question
to Mr. Adams? Judge Schwebel.
Judge SCHWEBEL: Mr. President, I should like to ask Mr. Adams the following: Would
it not have made sense for ELSI to have remained in operation and for its product lines or for
the business as a whole to be sold while it was operating? Wouldn't it have been easier to sell
the assets of a company which was functioning than to sell the assets of a company whose operations
had been suspended and placed in the hands of a caretaker force, and if so, why didn't
Raytheon pursue that option ?
Mr. ADAMS: It would have been possible only to do that at an earlier date before the money
ran out. We had this sort of terminai date of our operations dependent on when our capitai
funds ran out and after that we couldn't operate. So it was a difficult decision and we tried to
keep it going up to that point. And we felt that not in full operation but in a sort of caretaker
status where we had a small work force which was not draining us with the full payroll, who
could maintain the machinery, who could convert some of the work-in-process into finished
product, but there could have been a period of time like that where we would have been at a
very low level of operation, where it would have been possible for us to be in touch with potential
buyers, to let it be known that we were selling and to let them see something which if not in
full operation was at least alive and well in the sense that everything was being taken care of,
that finished products had been moved out and sold, that our customers could be told that we
were searching for buyers who may continue to deliver to you or can pick up deliveries at a
CON'I'R01N''I'l!RROGATORIO ADAMS 275
later date. If we had been able to do something of that kind, we could have taken advantage at
least of some of the points that you have suggested.
Judge ScHWEBEL: Thank you.
The PRESIDENT: I will put a question to you, Sir. How much was the total amount in American
dollars that Raytheon invested in ELSI ?
Mr. ADAMs: At that point, I think, yesterday, as I remember the figures that I gave, there
were 12 million dollars in capitai and 8 million dollars of guaranteed loans, which in a sense
were another form of capitai because the guaranteed loans we would have had to pay o:ff anyhow.
The reasons for the guaranteed loans as part of the capitai, if you want to look at it that way,
Sir, is that we avoided some of the foreign exchange risks by borrowing money within the country
where we were operating. Twenty million dollars was the total.
The PRESIDENT: These 12 million dollars ......
Mr. ADAMs: Twenty million dollars.
The PRESIDENT: No, I mean the first 12 that you put, this was for buying shares or what?
How does these 12 million dollars operate?
Mr. ADAMS: I havn't got the schedule with me, Mr. President.
The PRESIDENT: Roughly.
Mr. ADAMS: We had an Italian partner earlier and the time came when more financing
was required and we arrived at a certain moment where when the additional money was put
in, he did not want to put more money in, so we put it in and gradually we arrived at the stage
where we owned, Raytheon and Machlett together, 100 per cent of the shares, as compared to
smaller earlier investments.
The PRESIDENT.: I would like to put another question. You said yesterday, at p. 260,
that you expected « we could have paid off the small creditors and we could have made a deal
with the major creditors at 40-50 per cent minimum of what was owed to them )), I suppose
that the major creditors were the banks. Do you thir\k that they would accept 40-50 per cent
of your credit ?
Mr. ADAMS: Yes, we all believe that. We had considerable discussion of that, and as it
was, they got nothing. If we had been able to sell at book value they would have been paid
off completely. In the sort of worst case, which is not what we expected to happen but the worst
case as we saw it, we felt that, and there was some discussion with some of the banks that gave
us real reason to believe that-Mr. Clare, the later witness who was closer to this than I was
could confirm this point-we did have good reason to . believe that banks under that set of
circumstances, based on experience of other banks in other similar circumstances, would have
quite reasonably be expected to accept so per cent and perhaps lower.
The PRESIDENT: Thank you very much, Mr. Adams, for your assistance.
Mr. ADAMs: Thank you, Sir.
The PRESIDENT: I understand now that the American delegation is going to call Mr. Clare.
Mr. MATHESON: Yes, Mr. President, we would like to do that, and I therefore would ask
that you invite Mr. Clare into the room to testify and that Ms. Melinda Chandler be invited
to question him.
The PRESIDENT! Would you call Mr. Clare, please.
Ms. CHANDLER: Mr. President, distinguished Members of the Court. In 1966 Mr. Clare
became Vice-President of Raytheon Company and Generai Manager of its European management
subsidiary, Raytheon Europe .International Company. · The principal objective of
Raytheon Europe was to furnish European companies which were majority owned or controlled
by Raytheon for technical, managerial and other assistance necessary ~or them to become strong,
276 RASSEGNA DELL'AVVOCATURA DELLO STATO
profitable enterprises. In February of 1967, Raytheon and Machlett appointed Mr. Clare to
be Chairman of ELSI's Board of Directors with the express instruction to make ELSI viable.
In this capacity Mr. Clare personaliy participated in numerous meetings with Italian Government
officials in an attempt to persuade them to participate in and support ELSI. Mr. Clare
was also personaliy involved in the development of the orderly liquidation plan.
In addition to his extensive management experience, Mr. Clare is an electrical engineer.
H e has a Masters degree in electrical. engineering from the University of Birmingham in the
United Kingdom. He has worked for major telecommunications and electronics companies
and in the United Kingdom's Ministry of Aviation.
Mr. Clare, would you please describe for the Court your association with ELSI during
late 1967 and early 1968.
The PRESIDENT: Before you speak, Mr. Clare, could you please make the solemn declaration.
Mr. CLARE: I solemnly declare upon my honour and conscience that I will speak the truth,
the whole truth and nothing but the truth.
The PRESIDENT: Thank you very much. You may proceed now.
Mr. CLARE: In February 1967 I was appointed by Machlett and Raytheon as Chairman
of ELSI. I had with me Scopeliiti and Bianchi, who were my Controlier and Legai Adviser
in Raytheon Europe - they were made Directors of ELSI. We carried out initialiy a quite
exhaustive analysis of ELSI's problems and we produced a Report in May 1967 outlining in
great detail the problems and possible solutions to the problems.
These were four major issues: there was the question of finance; there was debt of about
13 billion lire and ELSI was paying nearly 1 billion lire a year to the banks, of which something
like a half, I think, was going to the IRI banks. Up to that point, you might say that the only
people who made profit out of ELSI were the banks. So ELSI needed further financing.
Then the whole middle management systems and manufacturing systems needed upgrading.
We put in about ten experts from Raytheon, who joined me there. They were ali Americani
Italian, who had ali been horn in Italy. W e had a Managing Director who was Co-Managing
Director with Profumo, experts in almost every function in the company and two European
sales executives, one covering microwave tubes and one covering semi-conductors.
We did upgrade the systems; we got significant improvements in manufacturing efficiency
and I wili refer to that in a little more detail, line by line, when I am talking about the various
Ii n es.
There were, at that time, about 200 people too many. There had been a reduction in sales
of the Hawk tubes and one or two other things. If it had been America, we would have gotten
rid of 200 people right away. It was impossible to get rid of anybody there. We in fact got rid
of two people off the television line; we had a strike for about three weeks on that line. So,
effectively, the workforce was static. So we needed new products which were not too highly
technical, because there were not many qualified engineers in Sicily, and we outlined in the
Report a whole list of new products that were low technology and could have been gotten in
very quickly if we could have made the 30 per cent law work, of which I am sure you have already
heard, which is that Government agencies are required to buy 30 per cent of what they buy
from the Mezzogiorno, if it is available to be bought there.
Products were looked at were typicaliy low technology. First of ali, cable forms in telephone
switching and motor cars: telephone switching is STET, which is again the Government. Alfa
Romeo is Government-owned, or was Government-owned until quite recently. In both of
these, dozens of wires that have to connect everything to everything, ali put together and bound
up into a thing you can just put into the telephone switching unit or a car - those are calied
cable forms. We could have certaintly very rapidly have had so girls working on that, but we
had no joy from trying to talk to STET and the motor car company about that. We could
have wound relays - these are the things that go click, click, click in the old telephone
exchanges - that was a very simple thing to do to begin with under specification from STET
and then worked up to making ali the other bits that go with the relays. With the 30 per cent
law operating for the X-ray tubes, we could have at least doubled or trebled the activity in that
INTERROGATORIO' CLARE 277
area. We would move on from making these bits on telecommunications to sub-assemblies -
there were all sorts of sub-assemblies that could have been made under sub-contract from
STET. W e did, in fact, talk to STET about this but they regarded us with suspicion as potential
competitors. They were after all, as was the motor industry, a growth industry. It is still a
growth industry, so there was plenty of room for sub-contract work to be given to us without
conflicting with their own companies. We made it clear that we did not intend to go into competition
with them in telephone switching. We had very little capability of doing that.
Then, on the semiconductor front, we could have sold high-voltage rectifiers to the motor
car industry for electronic ignition. In railway systems we could have sold power rectifiers.
There are a whole list of things like this, all of which related to Government-owned activities
that could have given us sub-contract work and very quickly we could have employed those
200 people. But we had no positive reply from anybody.
We felt we needed a significant Italian partner. I am sure you have already heard that
we should have had transport cost help for our television tube business. The cost of buying
tubes in Germany and shipping them to Sicily and then shipping them out again for export
was extremely high. And there was the 30 per cent law, which we were assured should work,
but it did not. So we felt we were sort of babes adrift a bit in the Italian political environment
and we needed a significant partner that could help us handle this and also bring in the additional
capitai that was necessary to make the company look more sensible and not pay a billion lire a
year interest.
Ms. CHANDLER! Mr. Clare, with regard to this latter point, what steps did you take to
offer the regional and national governments an opportunity to provide ELSI with this assistance
or participation that you were seeking ?
Mr. CLARE: You have already said that we had a large number of meetings. Over a year
we had over 70 meetings with practically the entire Italian establishment. The very first meeting
was with Minister Andreotti, who was then Minister for Defence, and meetings with Ministers
Colombo for Finance, Rumor who was then head of the Christian Democrat party, a whole
heap of Ministers. We met with the management of IRI, with all the banks, the governor of
the Bank of Italy. In Sicily we met with On. La Loggia who is the head of ESPI, which
is like IRI in Sicily, and a lot of his people. We met with President Carollo and with all the
union heads. We met with some of the commerciai people such as the head of FIAT. In fact
I cannot think of anyone who was anyone at all in the total establishment of political Italy and
Sicily that we did not talk to.
It started by everybody being extremely enthusiastic and wanting to help us. There was
an entity there which they thought was very valuable. I suppose the only people who, right
from the beginning, were very blank-faced about it all was IRI. We never got even one smile
from them. But certainly the rest of the government Ministers that we met were very helpful
and made statements about the various assistances we should be having - Minister Colombo
said we should have the transport cost and i t would be arranged; the Minister of Industry sai d
the 30 per cent law should apply and it will be applied. But nothing happened.
Towards the end of that year, in the latter quarter, the whole atmosphere began to change.
We made it clear to everybody as we talked to them- we gave everybody our Report, by the
way, it was very widely circulated so that IRI and ESPI and every Minister we could think
of had it to read - that we were putting in this 4 billion lire, which was a last effort and
that we thought it would last maybe a year or fifteen months; that if we could not get things
sorted out in that time we would then have to let it go at that. We were not prepared to put
in any more money. That was made very clear to everybody. And if in fact we ran out of
money and were legally forced to stop, then we would organize an orderly liquidation.
As time progressed people like La Loggia became less and less optimistic and started to
talk about it being necessary to have IRI in as a third party and at that point we became more
closely connected with the President of Sicily, President Carollo; he was obviously extremely
keen to keep the plant going and to develop electronics in Sicily. We had a period when to
278 RASSEGNA DELL'AVVOCATURA DELLO STATO
begin with he was effectively saying to us: I will see to i t all, an d i t finished up with his saying:
we ha ve go t to get IRI in. Then one night we met with him an d I thought he was saying:
<< I have done it! » He in fact took us to his home and there were whiskies issued all round and
we toasted each other and we thought it had been settled. The next day we found it had not.
So right at the end, which was I think 29 March or around there, the last night when I
had been told by my legai man: you ha ve now got to dedare redundancy - which we had
already done a few days before- and we had to send out notices to all the people. About 9.30
that night I was called over to the Ministry of Industry and the Generai Manager told me
he was sorry that the Minister was not there - althoè.lgh there seemed to be a lot of people on
the other end of the telephone - and he really said we cannot afford the politica! chaos for
you to dose the plant. W e do not want you to dose the plant. Y ou will upset the Prime Minister
if you do. W e sai d we had waited a year to see w ha t we could do, w ha t deal can we do ?
The answer was effectively nothing, just do not dose the plant. Do not send out those notices.
So we sent out the notices and what was very peculiar was that the ltalian staff in the office
would not touch them. They seemed to be frightened of something and so in fact Scopellìti
and Bianchi and I personally inserted about 8oo letters into envelopes and stamped them and
took them round early in the morning and posted them off. That was that. And then two days
afterwards Profumo, who was the Italian Managing Director there, met with Carollo and told
him that the Region was going to pay for the people until a new company was formed and that
the Prefect would seize the assets and that would be that. So at that point that was it.
Ms. CHANDLER: At that point, what did you decide to do?
Mr. CLARE: Y ou mean after the seizure of the assets or prior t o the seizure of the assets ?
Ms. CHANDLER: Prior to the seizure of the assets what was your plan for the treatment of
ELSI's assets?
Mr. CLARE: Well, prior to that, we had planned an orderly liquidation. W e had taken the
decision we would not go bankrupt, I had that dearly from Raytheon, and we set about organizing
this orderly liquidation. W e moved all the books of the company up to Milan so that if we did
have problems we could at least control the books and control the debts that we owed and the
debts that people owed to us. We had moved quite a lot of inventory up there so that we could
sell it from there if we had to. Our plan was to keep about 130 people working in the plant to
work off the inventory that existed there and finish manufacturing the products, to keep making
product as necessary to keep our customers happy and to sell off, in an orderly fashion, the assets
of the company and we organized small task forces to deal with each facet of the problem.
W e had a task force, which I was going to run, which would be concerned with contacting
potential purchasers. We had a task force to deal with the 130 people in the company and
another small task force to contact the banks and another task force to contact our suppliers
and we had named people for all these task forces. Later on when the plant had been seized,
I handed over to Oppenheim, who was another Raytheon Vice-President, and he was going
to run these task forces and the activity of the orderly liquidation. I was then moved to look
at the other nine or IO companies in Raytheon Europe, all of whom needed some attention.
Ms. CHANDLER: Mr. Clare, what was the role of Raytheon in this? Would Raytheon have
been willing to back this plan in any way ?
Mr. CLARE: Well, Raytheon certainly was willing to back it. They had guaranteed to me
that they would guarantee the cash flow necessary to make the liquidation work. They were
prepared to purchase the receivables at face value to provide money to do this and one of our
plans was to pay off all the small creditors first if we were allowed to do so, so that we were
left with only all the major banks to deal with as the major creditors. Raytheon provided money
and we actually started to pay off the small creditors but then the banks intervened and said
that they did not want that to happen as that was showing preference. Any one of those small
creditors could have forced the company into bankruptcy. Our idea was, and we thought the
banks would agree with us, to get rid of all of those with only the hanks left to deal with and
INTERROGATORIO CLARE 279
we could bave an orderly arrangement and an orderly liquidation and not bave one of these
small creditors coming along, put us into bankruptcy and put us into a position we did not want.
Ms. CHANDLER: Mr. Clare let us turn, if you. would, to the sale of ELSI or its product
lines themselves. If you would, please describe for the Court each of ELSI's product lines and
the features of each that you personally thought would be particularly attractive to potential
purchasers of ELSI ?
Mr. CLARE: I think before I address each line individually, it is important to address the
generai issue of the intangible values of the company that existed at that time. Certainly, one
of those very valuable intangible assets was. the relationship with Raytheon and it was quite
clear that Raytheon had to continue to give technical and patent and know-how support, as
it had been doing, to all of the product lines and it was Raytheon's intention that that particular
intangible asset would continue, And there were other very valuable intangible assets. W e
can take some of them: the customer base. I t takes years to establish a base of customers. When
you start you bave to put in a lot of marketing effort and selling effort, which leads your sales,
so that you finish up with something like IO per cent of the sales turnover being used to sell.
ELSI built up quite rapidly and in five years it went from very little to S billion lire. Now,
if you put in, say, a billion lire of selling costs starting from zero (that is a lot of money and
you would not bave put that in, but that is just an example), at the end of the year you might
be selling at half of what you would, ultimately expect for that investment, say, IO billion lire.
Half of that would be five. So you could put in the billion lire to get an average of 2.5 billion
lire sales in the first year. Now it is quite easy to plot out, year by year, how much extra sales
expenses you · are putting in to build up your sales to get to the point w bere you bave 8 billion
lire sales. However you do it, you come out with a figure of at least a billion lire for extra sales
costs. There are two or three ways you can do these calculations, but a billion lire is the sort
of minimum figure one gets to. Then, if you take the technical and know-how support, ELSI
was putting in about 8 per cent of its sales into research and development, that is about what
we were putting in in ITT. I was once Technical Director of ITT Europe in which we had
about 6so,ooo people working and the average R&D investment was 8 per cent of sales. If
one says that there is a five-year product life, after five years' investment at that leve!, you
finish up by saying at that point, I bave invested something like 2.5 billion lire in order to be
able to make all these products. If one says it only takes you three years to develop a product,
rather than five, then you might say all that work, all that technology know-how, is worth 1.5
billion lire, and that again is fairly conservative. On top of that there's the technical know-how
that was fed in from Raytheon. And then one can look at the supplier base - we were making
sophisticated products that require well quality-controlled input materials and that means establishing
a relationship with each supplier, with getting the materia! from him, checking it quality
contro! wise, keeping in touch with him, having relationships with the suppliers quite regularly,
that supplier base is probably worth at least half of the customer base when you are dealing
with these highly sophisticated advanced technology products. And there was the labour force
that had to be trained. Now in Sicily it took us probably twice as long to train anyone as it
would, say, in Milan or in Frankfurt a:nd. that amounts to another large amount of money.
And then, as well as training people, one has to build up manufacturing know-how on the lines;
if you put just trained people on the .continuous process line with high technology products,
it is not going to work. They bave to learn how to work as a team and that manufacturing
know-how, which enables you to produce products of high quality and controlled quality,
is what we call manufacturing know-how, and that also has a high value.
Within the set-up we also established various support groups. There was a maintenance
group, there was a small engineering manufacturing group to make bits and pieces we required,
these also had a value. Then the Raytheon connection on its own was certainly extremely
valuable. And if you add all these up, when we bave done sums, not having just pulled figures
out of the air, you easily reach a figure of 4 billion lire plus. And that is real and valid. So that
was a supporting situation in considering the situation of each of the product lines.
Now we take the television tube line. We believed that could be sold as an independent
busipess because it was a separate entity. It was a black and white tube line, originally set up
280 RASSEGNA DELL'AVVOCATURA DELLO STATO
under license from America. I think it was from GE but I can't be certain of that, I can't
remember. As we progressed and made bigger tubes the question of implosion, the tube going
bang, was more of a worry. We took another license from America for a banding system that
made it implosion-proof. When we got there they were making about, of large tubes, 3o,ooo
to 35,000 tubes a month if they were lucky. There was a large amount of scrap, there was a
large amount of bad inventory. We cleared out ali of the inventory, we instituted a reclaim
section so that the tubes that were not good could be reclaimed because the big glass bulb was
something like 6 5 per cent of the cost of the tube an d h ad been imported from Germany a t
great cost. So we reclaimed the bad ones and that gave us significant improvement in yield.
W e had already got 20 per cent of the Italian market and we exported to Germany, France and
Holiand, I think something like 40 per cent of the output was exported. As a result of ali the
improvements we put onto that line we increased its manufacturing capacity to 50,000 tubes
a month and actualiy, in December of 1967, we manufactured and sold some 5o,ooo tubes.
That means that if we could have kept going, the sales volume in that line could have gone
up from 4-5 billion to over 6 billion per year. Now these transport costs we talk about amounted
to something like 6-8 percentage points of margin for that line. Prices were very competitive
and we were getting a standard variable margin of about 30 per cent. That additional 6-8 per
cent on 6 billion sales would have added in 4-5 hundred million lire of additional profit.
There was the possibility of colour, TV raising its head and we tried to talk with ali the
people in Italy about what was going to happen. We established the colour laboratory there
at a cost of some quarter of a million doliars, so that we could manufacture our own colour
tubes. I had been with ITT and I had been looking at the problem of colour television and in
my view one had to take a license from RCA and build an RCA colour television tube line with
an output of 40o,ooo tubes a year. We were actualiy in negotiations with RCA about license
possibilities. In fact, I have just checked dates. I thought Italy was late and they did not agree
on their colour system until 1975, and I believe that the first colour transmission there was
at the end of 1976, so that the black-and-white line had a good 1o-year life of potential sales
and profit if handled properly.
If we could now turn to the ray tube line. These were made with technical know-how
from Machlett which was a Raytheon company. Machlett had ray tube manufacturing plants
in America and in Switzerland. In Switzerland it was a company calied Comet. The tubes
being made in Palermo were modern high technology tubes which at that time had what was
calied rotating anodes. Where the stream of electrons hit the anode, it rotated round.
There was no burnt spot produced and there was no other manufacturer of those ray tubes
in Italy and we tried desperately to get more replacement orders from the Italian medicai system,
but it didn't work; if we could have got the 30 per cent law to apply, we could have doubled
and trebled the sale of those tubes, which were high margin products. The standard variable
margin was about 70 per cent.
Also in modern telephone switching, at that time, there was being introduced, relays
calied reed relays which were glass envelopes with little metal contacts inside. This required
glass sealing, contro! of vacuum, clean metals, and ali of the technology of the ray line
would have been applicable to these reed relays which would have been another new product,
but which we had to seli to STET.
Now I am quite certain that if, in the end, we had not sold it to anyone else, Comet, the
company in Switzerland, would have taken that line and either left it there as a EEC manufacturing
source, while they were in EFT A, or they would have just moved the line. Raytheon
would have taken it because it was a very good line.
In the microwave tube line, as you heard from Mr. Adams, we were manufacturing low
noise power devices for the Hawk missile system. This was a very special tube, low noise, very
few people can make it. There are in fact two of these tubes in the missile system. One of them
was smalier, we called it a local oscillator. A few years before, I had been responsible for most
of the defence missile systems in the UK. And one or two offensive systems as weli. And we
were developing systems similar to Hawk, I tried to get one or two English valve companies to
manufacture these low-noise, low-power klystrons and it was not possible. In the end we
took a license ftom Raytheon to manufacture these tubes in the UK through the company
INTERROGATORIO CLARE 281
Ferranti. And in their contract I put a clause to the effect that if they changed the materia!
of only one washer, the contract was void. And I think that indicates what high technology
was involved in manufacturing those tubes. It required very high quality control on the line,
it required very high maintenance of the equipment and it involved high technology ali the
way down the line. And we were making product there which in many cases was tested to be
better than the American product. That same line also made power magnetrons, the power
sources for big radars. And you have heard, and I'll say a little-more about it in a minute,
about the microwave ovens which Raytheon invented. There was a magnetron in the microwave
oven; in those days it was worth about so dollars, say 3o,ooo lire. Amana had been acquired
by Raytheon and as you know the sales of Amana microwave ovens grew from 2o,ooo over
a few years to half-a-million.
If we had had that product developing in ELSI, the microwave line could have been making
those magnetrons. And if we had only made for Europe a tenth of what they made in America,
for the magnetrons alone, we would bave sales of a billion lire or more per years.
Then the microwave ovens. I am sure Mr. Adams has already told you about these.
Raytheon invented it and developed it. It grew from 2o,ooo per annum to half a million per
annum Amana sales in America. There were very few exports to Europe. Tbey could bave
been manufactured in ELSI in the EEC as a European base. That would have been a very
good growth product and the licensing patent arrangements would have obviously been made
available by Raytheon.
On the semi-conductor line, when we got there they were manufacturing old-fashioned
products. Tbey were making germanium transistors. There were about I20 or ISO people on
the line. W e stopped manufacturing germanium devices. Raytheon provided us with help from
their semi-conductor operation to get rid of tbe stock of germanium.
We had a company in Zuricb called Transistor A.G. that was in silicon rectifiers, and we
began to put those two companies togetber to transfer know-how from Transistor A.G. to
ELSI, and we began to manufacture silicon rectifiers and high voltage stacks. These latter
are rectifiers stacked up to give high voltage rectification for use in television receivers. We
bad in mind that we would regard ELSI as the EEC manufacturing source of these products,
whereas Transistor A.G. was in EFTA, and we did provide a man who was tbe European sales
co-ordinator for these products in Europe totally.
And, of course, there were the opportunities to develop further higher power silicon rectifiers
particularly if we could bave made sales to the Italian Railways. If it had not been possible
to sell the semiconductor line, having gotten Transistor A.G. and ELSI working so closely,
we would have taken that line ourselves. In fact, after the seizure, by arrangement with the
liquidator, we purcbased some of the equipment from the high voltage stack line and we took
the man who was running it and we moved him to Zurich and we ran a line of fifty girls very
profitably for many years.
W e also bad surge arrestors, which w ere little glass sealed things, which if lightening strikes
the telephone lines saves damage hitting the equipment. W e sold some of these but not many.
But if we could have gotten STET to buy, we could have sold a lot more of them and we could
have probably then exported more. So, I think, that is a review of the lines.
Ms. CHANDLER: Mr. Clare how would you have gone about finding purchasers for tbese
product lines and selling them either as a whole or as by product line ?
Mr. CLARE: W e thought of this in three possible steps. The first thing was to try and sell
it as a total entity, tbe second thing was to try and sell it as two entities because the television
tube plant was literally just balf of the total plant and quite separate. If that did not work then
we would sell tbem as separate lines.
The obvious purchaser to try again for the whole assembly was IRI and it would have been
possible for them to have taken it, for them, very cheaply. I mean if they had taken it tben certainly
the Sicilian organizations, the Region itself and ESPI and IRFIS would have ali chipped
in and they would have had six billion, seven billion, lire without any trouble. A large part
of the bank debt were IRI banks so, they could bave kept the debt with their banks. Tbey
could bave paid book value and would only have had to put in quite a small amount of new
282 RASSEGNA DELL'AVVOCATURA DELLO STATO
capitai. They were in a very strong position to be able to make certain that the transport costs
subsidies would operate and that the 30 per cent law would operate. And, even today, I find
it incredible that that was not clone instead of what happened. Although there was much talk
about the need to preserve the plant and preserve the jobs of the people, IRI was hell bent on
closing it and making it bankrupt and destroying a lot of what was there.
1t would have probably been difficult to find anyone else other than IRI who would have
bought the thing totally but if we spii t it into two, there would ha ve been a number of potential
purchasers. As soon as we announced our voluntary liquidation, we began to get some enquiries
immediately from ali over the piace. We had enquiries from Japan for the semi-conductor
Iine, and enquiries from America; we had enquiries from Greece for the television line.
We would have approached, and we planned to approach, our major competitors. We
also planned to approach our major distributors. Sometime later on I actually sold off, not in
Italy, two companies that were in trouble to major distributors of ours who were using products
of those companies. And if it carne to selling the individuai lines, then, if we could not seli
the X-ray Iine and the semi-conductor line, Raytheon would certainly have taken these.
And as far as the microwave tube line is concerned, that would not have been a question
of seliing, that would have been a question of holding an auction and taking the highest bidder
with the maximum goodwill. W e had this high technology there which existed nowhere else
in Europe, except where we Iicenced it in the United Kingdom. And there, I am sure, we would
have gota goodwill figure over and above book value. Now, we had ali those plans set up, as
I indicated earlier, to start this voluntary liquidation, but we had the assets seized and when
the assets are seized, there is nothing to sell. So, at that point, it stopped.
Ms. CHANDLER: Mr. President, our examination of Mr. Clare is nearly complete. However,
I do note the lateness of the hour, would you like us to continue ?
The PRESIDENT: Please finish now.
Ms. CHANDLER: Thank you. Mr. Clare, in your assessment, would the sale ofELSI's
assets have generated sufficient revenue to pay off ELSI's creditors?
Mr. CLARE: Yes, I have no doubt about it. Earlier in the year we had cleaned up the receivables,
we had also cleaned up the inventory. In fact, in 1966 and 1967, fora combination of
cleaning up the inventory and writing off bad debts, we wrote off two billion lire. So on the
balance sheet we were looking at, the values that were there, were after having written off two
billion lire, in fact a little more than two billion lire, in the prior two years.
We felt very strongly, and with conviction, that the receivables and the inventory were
very good. In fact, Raytheon had guaranteed the cash fl.ow necessary for the voluntary liquidation
and they were prepared to purchase the receivables at face value. This Ieft us with the
fixed assets that w e had to seli. W e have been through all the lines an d their characteristics
and, certainly, coupling this with the intangibles which I talked about, I am sure we would ha ve
had no difficulty in obtaining book value.
Ms. CHANDLER: Mr. Clare, what is the book value of the company, that is the value you
expected to actually receive upon the sale of ELSI's assets. How does this compare to the quick
sale valuation that was prepared at the time of the orderly liquidation ?
Mr. CLARE: As managers, we had responsibilities obviously to get as much money as possible,
and so we were aiming for book value. But in talking to Raytheon and arranging for whatever
money had to be provided we had to take a very conservative view of what we thought we could
do a t the bottom end of the scale. And this quick-sale book value was that figure. It also related
to what we worked out as the sort of figure that we thought we could offer the major creditors.
We desperately wanted them to agree that we could pay off ali the small creditors so that we
had no possibility of any one of those raising the issue of bankruptcy. And in talking something
like so cents on the dollar, the big banks are big boys. They know that if they do a deal with
a voluntary liquidation they get something; if they go into bankruptcy, they are likely to
get a lot less. In fact, I believe, they finished up with less than I cent on the dollar.
INTERROGATORIO CLARE 283
But I also felt very strongly that Raytheon would support and guarantee the so per cent
payment to the banks. So this was our approach. We could talk so per cent, wc could get a
guarantee from Raythem;t to pay off ali the small creditors and we set ourselves a target which
wc felt was not easy, but not difficult, to meet. Wc would have tried all the time to have gotten
book value and whatever wc got above, the quick-sale value, then all the creditors would have
shared in it pro rata, that is, ali the creditors who had not been paid off.
Ms. CHANDLER: At this point the requisition of ELSI's assets intervened and you were
not able to proceed with your planned orderly liquidation. What effect did the requisition
have on the value and status of ELSI's assets at that time ?
Mr. CLARE: Well, there is a bit of simple logic there. If you are trying to sell something
and someone takes it away from you, you've got nothing left to sell. That means there was no
money to go into the orderly liquidation, no sales proceeds, and it was necessary to have continuai
access to those assets in order to preserve the value of the intangibles. We were keeping 130
people in the plant. Take for instance the customer base. If we had done it in an orderly way,
wc would go to the customers, we would keep them supplied to some extent, at the same time
the competitors would go to the customers and we would have to lower our prices to maintain
sales contact, but we would do that. But when we lose contro! of those assets, then the competitors
are there with the customers and we are out - nothing we can do about it. If you take
the question of manufacturing efficiency and quality and the training of the people - they
disappear. Its costs a fortune to train them, and they probably would get jobs digging ditches.
We had a very careful and methodical maintenance schedule for the equipment because it was
very necessary to do that, we had continuous processes. In the continuous process if you stop
it, it takes quite a long time to start it again. If you stop it and let it sit for three months,
it is like leaving a house empty for three months, when you go back the gutter has fallen off,
the toilet does not work and some bricks have fallen down - that happens on a line like that.
So that the result of the seizure of the assets and the stopping of their use very rapidly
reduced their valuation. It reduced the intangibles because you lose your customer base very
quickly, you lose your supplier base not as quickly, but in a pretty short time, the trained
people disappear, the manufacturing efficiency disappears and the quality of the machinery, the
maintenance of the machinery disintegrates very rapidly. So the effect of seizing it was that the
value obviously deteriorates very rapidly.
Ms. CHANDLER: Mr. President, this concludes our examination of Mr. Clare. He is now
available for cross-examination or for questions from the Court.
The PRESIDENT: Thank you very much. Do the Italian delegation want to cross examine
now, Professar Ferrari Bravo?
Professor FERRARI BRA v o: Y our Honour, if i t is possible, immediately after the coffee
break.
The PRESIDENT: We are going to have a break, and then we shall have the cross-examination
of Mr. Clare.
But, before leaving, I would like to put a question myself. How much do you estimate
what you call the quick-sale book value of ELSI ?
Mr. CLARE: I think we have the figure of 10.8 million.
The PRESIDENT: How much ?
Mr. CLARE: 10.8 billion.
The PRESIDENT: I mean lire. An d in dollars, how much is i t ?
Mr. CLARE: I don't do it exactly, I divide approximately by 6oo to get a figure, butI mean
that was not the exact figure at that time. So divide by about 6oo. Do you want me to do that ?
The PRESlDENT: No, I can divide also!
Thank you very much, we shall continue in IS minutes.
The Court adjourned from I I ·45 a.m. to I I ·59 a.m.
284 RASSEGNA DELL'AVVOCATURA DELLO STATO
The PRESIDENT: Please sit down. I call on Mr. Ferrari Bravo, who is going to crossexarnine
the witness on behalf of the Italian Delegation.
Mr. FERRARI BRAvo: Mr. President, I would like that, as in the case of the previous
witness, the cross-exarnination of Mr. Clare be conducted by Mr. Highet.
The PRESIDENT: Would you please call Mr. Clare to come in.
Mr. HJGHET: Thank you, Mr. President. Mr. Clare, I am going to try to keep my questions
as crisp and to the point as possible, and of course I know you are seeking to assist the Court
and counsel and I would prefer it if you would also make your answers as crisp as possible.
I arn referring to the Clare Report, your 1967 report, and you remember that in that, arnongst
many other things, there were at least three elements that you then specified as being necessary
to make a success out of ELSI or an ELSI -like creature. One was an additional capi tal investment,
presumably from the Italian State, of 6 billion lire. The second was new product lines,
which you have explained this morning, and the third was financial help, including Mezzogiorno
benefits, transportation subsidies and the like.
My question is: wouldn't any purchaser of ELSI, in whole or in part, have had equally
difficult problems confronting it or them?
Mr. CLARE: W e were hoping that the purchaser would be Italian, to begin with. An Italian
purchaser would certainly know a lot more as to how to handle the Italian environment than
we knew. If I can go back, I said we had hoped to sell it totally and we would try IRI again,
etc. If there was someone who was not Italian we would make it clear to them that these problems
existed and they would be forewarned and be in a very strong position to negotiate much
more strongly than we did. I have actually, in other circumstances, been in a similar situation
where I have negotiated changes before I took over whatever it was I was looking at.
Mr. HIGHET: But that would have required in any event a special application, a special
kind of ...
Mr. CLARE: I do not know how special it was. There were laws that existed that had not
been applied.
Mr. HIGHET: That leads me to my question about the Mezzogiorno benefits. You said
they were not being applied. Were you and the senior Raytheon, ELSI/Raytheon Europe,
management aware that you had a right, that ELSI had a right, to the benefits of these laws ?
If so, why didn't you do something about it?
Mr. CLARE: I personally had discussions with Minister Colombo, I personally had discussions
with Minister Bo. I personally had discussions with the Minister for the Mezzogiorno. All
assured me that the laws existed, we should have the benefit of them, and that it would be applied.
I do not know what else I could do.
Mr. HIGHET: What did you do? You had Dr. Bisconti as your counsel. What did you
or your counsel do when the laws were not applied ?
Mr. CLARE: We used our own counsel, Bianchi. He went round various offices in Rome
asking questions.
Mr. HIGHET: Was there any form of administrative relief under Italian procedure which
you could have sought a remedy ? If there was a right, there has to be a remedy to cure the
denial of the right. Was this pursued?
Mr. CLARE: Yes. Bianchi went around and carne back having talked to all the offices in
Rome, and said, « It is my view, and I will give it to you in writing, that as of now you should
be able to claim 300 million lire ». And we put on our balance sheet 300 million lire.
Mr. HIGHET: But Mr. Bianchi was not prepared to actually pay the 300 million lire.
Mr. CLARE: Why should he pay it? He worked for me.
Mr. HIGHET: Or undertake the performance of the Mezzogiorno benefit ? ·
CONTROINTERROGATORIO CLARE 285
Mr. CLARE: There are lots of funny things happening in the Mezzogiorno. You can walk
around and see a lot of projects that have been started and not fìnished.
Mr, HIGHET: I am really hearing that you bave your counsel walking around and asking
why something isn't happening and then saying, well in my opinion it wil1 happen and Minister
so-and-so has given us his assurance, and. so-and-so and so-and-so. It still does not happen.
Why don't you then do somethin~ about it?
Mr. CLARE: I do not know w ha t else I could have clone, unless I went to the Pope - and
l'm not being funny there. The Church are very influentiaL
Mr. HIGHET: But the Lateran Treaty might have ... However.
Mr. CLARE: Having been to the Ministers, I really thought that was about as far as I personally
could go.
Mr. HIGHET: Good. Let me ask you a subsidiary question along this line. What makes
you think, or made your think, or might make you think, that the Mezzogiorno benefits were
applicable to non finished goods ?
Mr. CLARE: I was told so by two Ministers concerned.
Mr. HIGHET: You were told so. Did you check to see whether they were right or wrong?
Mr. CLARE: No. If I ask a Minister something and he tells me something, I do not say
I do not believe you.
Mr. HIGHET: You mentioned- and this is a point of information- you mentioned at
the end of your testimony taking someone off the line after the famous requisition and the
bankruptcy. No?
Mr. CLARE: No.
Mr. HIGHET: Between the requisition and the bankruptcy?
Mr. CLARE: No. When we fi.rst went there, I said in the middle of the year, we took two
people off the television line when we were trying to improve it.
Mr. HIGHET: But you said you talked to a liquidator about this. I just must have misheard
you.
Mr. CLARE: You have certainly misheard me.
Mr. HIGHET: OK, I certainly did. Forgive me. Something I did not mishear was that you
did say very clearly, " as soon as we announced our liquidation » you got indications of interest -
you mentioned Japan, United States companies. Am I right?
Mr. CLARE: Yes.
Mr. HIGHET: When was this, roughly?
Mr. CLARE: From about the first week in April, roughly.
Mr. HIGHET: So, right around the time of the requisition?
Mr. CLARE: Yes.
Mr. HIGHET: When was the liquidation announced?
Mr. CLARE: The last week in March.
Mr. HIGHET: The last week in March. When was it decided? September 1967?
Mr. CLARE: No. We put in this money. We made clear we were not going to put in any
more money. We therefore had to watch very carefully that we stayed legal, as far as the
balanct; sheet was concerned, and I had both Scopelliti and Bianchi watching like hawks, so
that as the money was disappearing we were not getting into an illegal position in the Italian
situation and, in September 1-967, we were certainly a long way from being insolvent. It was
19
286 RASSEGNA DELL'AVVOCATURA DELLO STATO
only in 1968 that we had a few unfortunate incidents which made things disappear much more
rapidly than might otherwise have happened. In early 1968, Palermo was decimateci with an
earthquake and we had our girls afterwards sitting there with a string and a little weight working
away, and every time the string quivered they went outside. But Palermo was decimateci totally.
Mr. HIGHET:' I t was not an ideai time to announce an orderly liquidation.
Mr. CLARE: It was after that we announced it and we did not pick the time. The disappearance
of the funds, and in the situation to which we were, legally required to react, we had
to legally either go for orderly liquidation or bankruptcy.
Mr. HIGHET: Could you have made the payroll, the first payroll in Aprii? I do not think
you could have. Do you think you could have ?
Mr. CLARE: No, I do not think so.
Mr. HIGHET: You had 22 million lire in the kitty, roughly, and the payroll would have
been at least 25 million lire for the first week, which is the week before Easter week. So you
were essentially, as we say in the United States, belly up, from the point of the requisition.
Mr. CLARE: W e were belly up just before the requisition. That is why we went into voluntary
liquidation.
Mr. HIGHET: That's right. I am not debating with you as with counsel, but you also pointed
out that one of the contingency plans for taking care of the smaller creditors was so that any
one smaller creditor could not have clone - which had I been such a small creditor and had I
not been paid in full, I would have been sorely tempted to do-which is to throw ELSI into
bankruptcy so I could at least get a better bite of it and not be swamped by the major creditors.
If this was true, was ELSI a going concern ?
Mr. CLARE: I do not see the connection.
Mr. HIGHET: Would you say that a going concern, it is nota legai question, it is a practical
question. Would you define a company as a going concern capable of an orderly liquidation
when a t any moment a small creditor could throw it into bankruptcy ?
Mr. CLARE: Recognizing that as a problem, Raytheon made cash available and put it
in a bank in Milan and I started to pay off the small creditors and I paid off IJO-I40 small creditors
and the bank stopped me doing it.
Mr. HIGHET: That's right. You also said this morning that Raytheon had guaranteed cash
to make the payroll for the reduced number of employees for the period of voluntary or orderly
liquidation that you contemplateci.
Mr. CLARE: I did say something a little more than that.
l\1r. HJGHET: Yes, you did say something a bit more than that, but I just want to focus
on this cash.
Mr. CLARE: Not on that particular point, I said they guaranteed me the cash necessary to
control and execute an orderly liquidation.
Mr. HIGHET: That's right. Then you met, as I recollect, you met, and it's attached to
your affidavit, one of those marvelous exhibits and it's one of the meetings, it's the sort of the
antipenultimate meeting with Mr. Carollo. I believe it was Friday, 9.30 at night, and there
was a lot of back and forth and there had been meetings all that week. I t was obviously a very
difficult time, it was in Rome, and you were being besieged, essentially: " for goodness sake,
wait till Monday, we'll have everybody in on top of this - the highest authorities are very
concerned - they whizzed back and forth and then you went back to your hotel sometime after
12.30 a.m. and called Lexington (time difference would have been 6.30 or 6 in the afternoon)
and you talked to Mr. Phillips, and he said go ahead and mail them- and that's when none
of the girls would touch the letters and you stuffed the envelopes yourself.
CONTROINTERROGATORIO CLARE 287
Wasn't this trying to tell you something? Didn't you know, and you had been warned,
« warned » is a poor word, it had been stated to you in a heated discussion I presume, with
a politica! figure, a man of considerable enthusiasm and also considerable responsibility and
prominence in Sicily, who had stated to you, « Look, if you do this it's going to be a requi·
sition ». That had happened and that is in one of the meetings.
What di d you think a t the time, Mr. Clare ? W ere you of the opinion that you were
assuming a risk ? That you were in fact operating in a country which had been subject to
earthquakes, where the second biggest employer in the region was being put out of business ?
There were 8oo employees about to be given the pink slips and the girls wouldn't even fill the
envelopes themselves ? Didn't you think this was a management blunder?
Mr. CLARE: Certainly not. I had spent, goodness knows, how many months being made
promise, after promise, after promise.
Mr. HIGHET: Of thé same nature of the promises made that were recorded in that last
week in March?
Mr. CLARE: If you look back at some other records, there's lots of promises made. ESPI
even to be instructed to put in 6 billion lire. Promise, promise, promise. ELSI was to us an
entity they could have picked up very simply and run and made it go and applied these laws.
And we'd spent a year working with half of it having nothing but promises. My feeling as I
walked out of that room was that it was yet another ploy. I felt it was a ploy that would hold
us off until they had their elections and then would be back to where we were. I didn't
think there was any solidity in the proposal at ali.
Mr. HIGHET. Did it occur to you that if Raytheon had indicated that they wou\d have
been prepared to guarantee cash for meeting payroll and other limited purposes for the
orderly liquidation in the initial period, that, under the circumstances which appear to us
and to the Court, only in black and white on paper-these are minutes of meetings that
are held 20 years ago-wouldn't you have thought, as a businessman, that it would have
been a very prudent risk to take to extend the norma! situation for just one more week?
Mr. CLARE: I had spent many months going through ali sorts of proposals. They put
70% we put 30 %, we put so%, they put so%, we do that, we do the other. If it was
going to be something solid on their part, I would have expected some little gesture, some
tiny positive gesture that said here's IO lire towards it, cash.
Mr. HIGHET: And you didn't feel you got this?
Mr. CLARE: I didn't feel I got that.
Mr. HIGHET: Thank you very much Mr. Clare. Mr. President, I have no further questions.
Mr. PRESIDENT: Thank you very much. Do any of the Judges want to put questions to
Mr. Clare? Sir Robert Jennings.
Sir Robert }ENNINGS: Mr. Clare, I want to ask, I think a quite simple question, about
the liquidation. We heard from Mr. Adams this morning that the decision to liquidate had
been taken sometime before the decision was announced confidentially and we heard from you
that the plans for an orderly liquidation were really quite elaborate, quite, quite elaborate.
Mr. CLARE: Yes.
Sir Robert }ENNINGS: You had spenta good dea! of time in thinking out the best possible
ways of disposing of the assets. Y ou had your teams arranged and so on that you told us about
this morning. So there was, so to speak, a programme for an orderly liquidation. Now, what
I would like you to tell me is simply this. Was the giving of notices to the workforce immediately
the liquidation plan was ratified by the meeting of shareholders, was that giving of notice a part
of the originai orderly plan of liquidation or was it a later reaction to the failure of negotiations
with the Italian authorities.
288 RASSEGNA DELL'AVVOCATURA DELLO STATO
Mr. CLARE: We had two things happening in parallel. One was that we were watching
very carefully what was happening to the money, the cash flow in the company, and I had my
lawyer and my controller telling me: watch it, you know, it's approaching the criticai point.
We could see trends so that unless something happened we could see twp months ahead. We
had a Board meeting to formally note that we were running out of money and there had to be
an orderly liquidation and that we would not go into bankruptcy. When on the famous << last
night », when they said « keep going », my advisers were telling me « unless you put money in,
you can't legally keep going » and we had run out of money. In parallel with that, we had to
think also what would happen when we did run out of money. We decided to go through
an orderly liquidation while we were still working away and hoping and praying that President
Carollo could bring off a successful arrangement with the centrai government. We had to set
about planning our orderly liquidation so that, come the day the piant shut, we knew what we
were going to do. W e didone or two other things. Wehn the personal were on strike, we kept
management in the piant 24 hours a day so we couid cali on the carabinieri to protect the plant.
We had a ring of carabinieri around the piant 24 hours a day and for some time I and the other
management, had to walk through that ring. It was very unpieasant. We had to plan for the
liquidation in advance and in parallel with all the other activity.
Sir Robert }ENNINGS: Yes, I understand that very well, but I am stili unclear when the
decision was taken to give notice to the major part of the workforce, was this a late development ?
Mr. CLARE: The decision was taken at the Board meeting which said we've gotto go into
voluntary liquidation and we will have to give notice to the peopie.
Sir Robert }ENNINGS: That was in the first week of March, 7th March was it? It was
at the Board meeting where a decision was taken by the management to go into liquidation ?
Mr. CLARE: That's right, the 17th of March I believe.
Sir Robert ]ENNINGS: But were your plans for an orderiy liquidation aiready in piace?
Mr. CLARE: They weren't in piace. No. We took certain actions I think, and I would
have to Iook back at my notes to confirm these dates, but things like moving the books and the
inventory, I think, took piace after the Board meeting. l'm not sure of that but it was around
that time, and then we were thinking, when we had time to think, about the orderly liquidation
and pian for that. W e were still putting a lot of effort and energy into trying to avert it by still
having meeting after meeting, after meeting with Carollo et al.
Sir. Robert }ENNINGS: Thank you. If I could ask just one more question to confirm an
impression I had from what you were telling us this morning, and you may say that I am wrong,
but wouid I be right in thinking that the viability of ELSI as a company really depended aimost
entirely on getting Government contracts? Wouid that be right, or did you hope to be abie
to compete in other markets ? Because you toid us this morning a lot about the products that
you couid make, but the problem seemed to be that nobody was buying them. W ere you entireiy
dependent on the Government giving contracts, or did you think that ELSI was able to compete
in the generai market ?
Mr. CLARE: ELSI did compete for years in the generai market, and we did not reiy on
Government contracts in the history of ELSI up to its closure. And, in fact about two years
back, we made break-even having paid Soo million, I think it was - I shall have to check, but
it is around that - lire interest.
Now, there was a change in product mix. We lost some demand for the microwave
Iow-noise tube for NATO, but which did built up later, and in America we wouid have solved
the problem by firing 200 peopie, and stayed commerciai, stayed profitabie - at Ieast, not in
Ioss. Now it was a question of timing. Because we could not fire those 200 peopie, an alternative
was new product immediately, new product immediateiy of low technology. About the oniy
piace we couid get that in quantity to support those extra people was from the Government
areas which were covered by, we thought, the 30 per cent law. If we could have fired 200
production people, and restructured the company, we could have put in a lot of these products
CONSULENZA BONELLI 289
ourselves, we could have put in reed relays ourselves. W e could have put in microwave ovens;
we could have put in the microwave magnetron, but it was a question of timing. And ali the
time we would be trying to do that, we could be losing money paying 200 mouths that were
doing nothing. Not only doing nothing, but doing something negative, because they were around
the piace being in the way. So, it was a question of timing and, to get those products quickly,
it was lRI and its satellites that could have done it; and they could have done that if they had
taken the company. Now if we could hàve --,..- I repeat myself - fired 200 production people,
or if need be 250 people, and just had the people we wanted, with a restructured company
for the products we had, we could have built it up ourselves.
Sir. Robert ]ENNINGS: Thank you very much, Mr. Clare.
The PRESIDENT: I have another question. I would like to ask the following: you ha ve
just ~;aid that you. would have had to fire 200 people. I imagine that under Italian law you can
fire them by paying compensation. I t was not just that you could not fire them?
Mr. CLARE: Well, in Italy, there are laws and there is life, and the practical matter is that
effectively you could not fire people no matter What you paid them. We fired two and we had
a strike. You had to deal not just with the laws but with what the local unions would say and
do. In fact, there is no way you could get rid of 200 people, no matter what the law said.
The PRESIDENT: Thank you. Any other questions? W eli, I thank you very much, Mr.
Clare, for your assistance to the Court.
Mr. Matheson, I think that you want to take the floor?
Mr. MATHEsON: Thank you, Sir. In the remainder of the time we have today we would
like to present to the Court the views of two eminent Italian legai experts on the issues of Italian
law which are presented by this case.
The first of these two experts is Professor Franco Bonelli, who will address questions of
Italian law which have arisen with respect to orderly liquidation and bankruptcy. Professor
Bonelli is one of the leading comtnentators and practitioners in this field of Italian law. He
hàs; since I976, held the Chair of Commerciai Law at the University of Genoa; he is also the
author of numerous books and articles in this area and has served on many international and
Italian arbitrai panels. Therefore I would ask the Court to invite Professor Bonelli to speak.
The PRESIDENT: I invite Professor Bonelli to come to the floor.
Professor BONELLI: Thank you. Mr. President, distinguished Members of the Court.
I will address my remarks to severai issues of internai Itaiian law that have been raised by the
Respondent in these proceedings. I will demonstrate that ELSI's shareholders had the right
under Italian law to liquidate ELSI's assets. I will further demonstrate that at no time prior
to the requisition was ELSI obligated to file a petition in bankruptcy. Finally, I wili establish
that, notwi.thstanding the Respondent's assertion to the contrary, the Respondent has not documented
a single violation of Italian law by ELSI's management or shareholders and, indeed,
has never charged them . with any such violation.
The first section of my statement is the right to liquidate ELSI's assets. As I stated in my
affidavit (Reply, Annex I, para. I), Artide 2448, N. s, of the Italian Civil Code confers the
right on shareholders of ali Italian companies to liquidate the assets of the company upon a
resolution of the shareholders. This right is extended to shareholders of ali companies even
in cases in which the business and/or activities of the company are perfectly sound and profitable.
For example; shareholders of a small private company may elect to seli the assets of a company
rather than the shares of the company if they feel that the assets would be more readily saleable
than the shares. Normally, however, shareholders liquidate a company when the company's
business produces losses and the shareholders have decided to stop investing additional capitai
into the company, in order to curb the losses. This is how Raytheon and Machlett exercised
this right with respect to ELSI.
The Respondent in this case an d the affidavit submitted by Professor J aeger (Rejoinder,
Annex 32) do not dispute this statement of the law: that is that in Italy shareholders have the
290 RASSEGNA DELL'AVVOCATURA DELLO STATO
statutory right to liquidate the assets of a company for whatever reasons they see fìt - I think
this is a true statement in all countries, not only in Italy.
Instead the Respondent argues (Rejoinder, p. 197) that because of ELSI's fìnancial situation,
Raytheon and Machlett were not entitled to engage in an orderly liquidation. The Respondent
identifìes various laws which should have prevented the orderly liquidation of ELSI. The
Respondent asserts(Rejoinder, p. 197) that ELSI should have engaged in a compulsory liquidation
under Artide 2447 of the Italian Civil Code; that ELSI should have been declared bankrupt
under Artide 217 of ltalian Bankruptcy Law and that ELSI's management engaged in criminal
conduct under various provisions of Italian law.
I wili discuss each of these in turn. But fìrst, let me give you an overview of the alternative
available to shareholders seeking to liquidate the assets of a company under Italian law.
With regard to a company being liquidated, it can appear at the outset, or at any point
in the liquidation, that from a reasonable perspective, the total amount of assets is not sufficient
to satisfy 100 per cent of the liabilities. At p. 197 of its Rejoinder, the Respondent states that
"an orderly liquidation ... requires the 100 per cent satisfaction of creditors » and not the so
per cent settlement envisaged by Raytheon and Machlett.
The Respondent's statement as it relates to Italian law is incomplete and as such is wrong.
Apparent inability to pay all creditors at 100 per cent is not fatai to a voluntary and orderly
liquidation. Severa! alternatives are available to the shareholders.
First, a liquidator may settle some major unsecured debts, especially with large creditor
banks, or others, at a reasonable percentage. These settlements are both legai and practicable.
Large creditor banks in Italy have every incentive to settle these debts. Any rational creditor
would prefer to obtain a reasonable percentage of its credits promptly in a liquidation, rather
than talcing the risk of receiving little or nothing after a long delay in bankruptcy. Of course,
if the settlement is guaranteed by a parent company, the incentive to settle is even stronger.
Professor J aeger in his opinion agrees that settlement is common practice.
Professor Jaeger also correctly notes a second incentive that large creditors have to settle
their credits (Rejoinder, Annex 32, para. 3). According to Italian bankruptcy law, as Professar
Jaeger underlines and is correct, the trustee in bankruptcy is obligated to file suit to recover
all payments made to creditors in the year preceding the declaration of bankruptcy. Therefore,
banks an d other large creditors in I taly ha ve a considerable interest in settling a t reasonable
percentages (like 40 or so per cent) to maximize the recovery on their credits and to avoid
having payments they obtained in the year preceding the bankruptcy taken away by a trustee
in bankruptcy. This is the fìrst alternative: settlement with large unsecured creditors.
Second, if the settlements obtained are either not sufficient or if settlements are not obtained
for any reason, the shareholders have other alternatives. They can advance funds to the company
in the form of a capitai contribution or they can reduce or waive their own credits towards the
company, and/or they can postpone such credits until after all other creditors have been paid.
In Italy, shareholders frequently do one or any combination of these alternatives, and also they
intervene with temporary loans to the company in order to facilitate its orderly liquidation.
What if all these efforts fail ? There is stili an alternative. If, notwithstanding the settlements
with creditors and intervention by shareholders, the liabilities of the company stili exceed
its assets, the liquidator can propose to all creditors to proceed with their orderly liquidation
by obtaining their consent to be paid only a reasonable percentage of their credits. This special
procedure is called "private settlement » (in Italian we say concordato stragiudiziale) - out of
the court, it means. It is very similar to straight creditor settlement. The principal difference
is that a «private settlement » (concordato stragiudiziale) involves settlement with all creditors,
while a straight creditor settlement involves settlement with a limited number of creditors,
usually the large creditors. The « private settlement » approach has been widely studied and
approved by Italian commentators. I refer the Court to Frascaroli Santi, Il concordato stragiudiziale,
Padova, 1984; F. Ziccardi," Concordato stragiudiziale »,in Dizionario del diritto privato,
Milano, 1981, p. 34S· I do not mix citations here but it is a undisputed point.
Why would creditors agree to a private settlement? Again, the incentives are the same.
The result of an orderly liquidation with settlement of creditors is better than a liquidation
CONSULENZA BONELLl 291
through a trustee appointed by the court. Also1 creditors avoid the risk that a trustee in
bankruptcy would try to recoup any payments to creditors made within a year preceding the
bankruptcy as mentioned above.
If these alternatives fail, or if a company elects not to attempt a liquidation, the company
may resort to the courts. A company may either make a petition to the court for a judiciary
settlement or file. a petition for declaration of banki'uptcy. In a judicial settlement (in Italian
.concordato giudiziale) • the court must assure itself that the . company meets certain requirements
for the procedure and issues a judgment to this effect. At the same time the court appoints
a trustee, who•ultimately is responsible for·the sale of the company's assets~ The time ·period
between the petition to the court and the judgment is rathedong: anywhere from 3-4 months
up to 2-3 years. lt is a long period of time. During this time period, ali sales which are made
are performed by a liquidator appointed by shareholders and with the support of the shareholders.
In conclusion, in the present case it appears that the sale of ELSI's assets would have been
sufficient to pay ali creditors in full, including the debts towards the shareholders (on this point
I refer to the statement of Coopers & Lybrand) I did not see tbe accountings, tbis is oniy wbat
l read. However, thisdoes n<>t matter. Even ifit appeared that tbe sale ofELSI's assets would
have been insufficient to pa:y allliabilities, ELSI could bave taken any otbet: alternatives availabie
to i t under I talian la w: fust, settlements witb large unsecured creditors; second, if su cb settlentents
sbould have proved insufficient, shareholders couid have made a cap